Age Pension explained


Age Pension explained

If you are getting ready to retire soon, most likely you will be trying to organise your savings to create an income stream, but also to maximise the Age Pension entitlement.

If you have retired already, you might be wondering if the Age Pension payment you are currently receiving is actually correct or maybe you could receive more.

Or maybe, like many retirees and pensioners, you feel like tearing your hair out in despair when dealing with the Centrelink office.

Well, I know the feeling.

Age Pension and planning for retirement is a big topic, and first, you need to understand when a person becomes eligible to apply for the Social Security payment such as Age Pension, so in this article I will answer the following questions:

  • What is the Age Pension age test?
  • What is Residency test
  • What are Maximum Age Pension Rates
  • What is Means testing
    • Income Test
    • Asset Test – how do they work and how they can impact you.

Age Pension

The Age Pension is designed to provide income support to older Australians who need it.

First, there are two tests you must meet:

  • Age Pension age – which is your pension eligibility age,
  • Residency Test.

If you don’t meet those two tests, there is not point for you to even continue this discussion. But if you do, there is lots that you can gain.

So, let’s talk about the first requirement:

Age Pension Age

For years, the retirement age in Australia was 65 and to make it easy that was also the age requirement to apply for the Age Pension support.

But in 2017, Australian government made changes and gradually increased from this age test 65 to 67 years. The general explanation and justification for this change is that we live longer, our life expectancy is greater, therefore we can work longer as well, and this is what government believes most people want.

There is some truth to this, but the real reason is that the number of retirees is growing from year to year, this is becoming the biggest proportion of our Australian community, and the government has to find ways to reduce the Age Pension expense for the budget, either by delaying entitlement – hence extending the age when you can apply, or by making the eligibility rules tougher and tougher – which we can see in ongoing changes to Income and Asset tests.

So, as we are today, you have to be 66 years of age to be eligible.

However, a person born between 1st July 1955 and 31 December 1956 has to reach the age of 66.5, and if you were born after 1st January 1957 your Age Pension age is 67.

If you are still unsure and unclear about it, you can find a Pension Age Calculator on MoneySmart site: Click here

Assuming you passed the age test, let’s now review the second test:

Residency test

You must be an Australian resident to qualify, which means:

  • you are an Australian citizen,
  • you hold a permanent resident visa – please listed to additional criteria,
  • you hold a protected special category visa (this is a special type of visa granted to NZ citizens before 2021).

You must also meet at least one of the following criteria:

  • you have had an Australian residency for at least 10 years and at least 5 of those years must have been consecutive, so you better not lose your permanent visa if you travel overseas,
  • You are a woman who married and Australian resident, you have been an Australian resident for the last two years and your husband passed away – so you will be regarded as an Australian resident,
  • You were receiving an Australian widow’s pension or allowance immediately before you reached you Age Pension age. You can just simply apply for the change and transfer of your benefit to Age Pension.

There are some exemptions, such as:

  • If you lived in a country Australia has an international social security agreement with (eg New Zealand) then years of your residency in that country may count towards you 10 year residency requirement in Australia.
  • Refugees, former refugees and their families are exempt from the residency test.

Maximum Age Pension rates

As at today’s date, which is April 2021 the maximum payments are as follows:

  • Single pensioner – $952.70 per fortnight ($24,770 per annum)
  • Couple (each) $718.10p.f. ($18,670 p.a.)
  • Couple (combined) $1,436.20p.f. ($37,341p.a.)
  • Couple separated due to illness receive the single rate each of $952.70 each p.f. with totals to $1,905.40p.f. ($49,540p.a. combined)

Payments listed include Maximum Pension Supplement and Energy Supplement.

Pension rates are indexed to ensure they keep pace with Australian price and wage increases and Australian pensioners received their last increase in March 2021. If you want to find out about the rate of pension increase benefit – watch this video.

Assuming you passed the first two tests, now you can start calculating how much of that Age Pension benefit you could get by applying two additional Means Tests:

  • Income Test and
  • Asset Test.

Why is it important to understand those two tests?

In 9 situations out of 10, there will be a prominent test that reduces your Age Pension benefit or removes it altogether. You need to know which one affects you the most, you need to know which beast you are fighting against and only then you stand the chance of winning that war.

Income Test

The government graciously allows you to earn extra income:

  • single person – up to $178.00 per fortnight ($4,628 per year) to be exact and still receive the full Age Pension payable to you.
  • couple that threshold is $316.00 per fortnight ($8,216 per annum)

If your income is greater than those listed limits, your Age Pension benefit is being reduced by 50c for every dollar above that limit and will reduce to zero when:

  • single person – $2,083.40 per fortnight ($54,168 per annum) or more
  • couple – $3,188.40 per fortnight ($82,898 per year) or more
  • couples that are illness separated, the figures are always as two singles.

It is important to remember that you can earn up to $300 per person per fortnight from work, and this amount may not be included in the Age Pension income test – if you are registered and eligible for a Work bonus.

Looking at the level of income you are allowed to earn and still be eligible for Age Pension, even if it is only part of it, you might start wondering why our government is so thoughtful and caring for the needs of pensioners.

Well, the truth of the matter is that majority of pensioners miss out on Age Pension benefit not under Income Test at all, but under Asset Test. And with Deeming rates being as low as they have been for many years, the government is not really risking much of Age Pension overpayment.

Just about the only way when your Age Pension is reduced under the income test, is when you have an income from some kind of a pension – e.g. Overseas pension, or another form of the government pension – makes you think – doesn’t it?

Asset Test

Asset test is the one that kills off most Age Pension entitlements or reduces your benefit dramatically.

I have seen many cases where under the Income Test a single pensioner or a retired couple are eligible for the full Age Pension benefit, or high portion of it, but under the Asset Test, it reduces to very low amounts or close to nothing.

So now, let’s go over those limits – you are eligible for the full Age Pension if your assets are below the following limits:

  • Single pensioner & homeowner – $268,000 – this limit will increase by $4,750 on 1st July 2021
  • Single pensioner & non-homeowner – $482,500 – this limit will increase by $8,750 on 1st July 2021
  • Couple (combined) homeowners – $401,500 – this limit will increase by $7,000 on 1st July 2021
  • Couple (combined) non-homeowners – $616,000 – this limit will increase by $11,000 on 1st July 2021

If you have assets above those limits, your Age Pension benefit will be reduced by $3.00 per fortnight per $1,000 of assets and it will cut out to zero at this amounts:

  • Single pensioner & homeowner – $585,750 – this limit will increase by $2,750 on 1st July 2021
  • Single pensioner & non-homeowner – $800,250 – this limit will increase by $2,750 on 1st July 2021
  • Couple (combined) homeowners – $880,500 – this limit will increase by $4,000 on 1st July 2021
  • Couple (combined) non-homeowners – $1,095,500 – increase by $4,000 on 1st July 2021
  • Couple (ill-separated combined) homeowners – $1,037,500 – increase by $5,500 on 1st July 2021
  • Couple (ill-separated, combined) non-homeowners – $1,251,500 – increase by $5,500 on 1st July 2021

So we have gone over all general rules you need to meet before you can apply for the Age Pension benefit.

The main problem with those rules is to know how they apply to each investment type you have, as they vary depending on where your savings have been invested, how long ago and if they trigger any type of Centrelink rules exemption.

So care should be taken before you decide to commit any of your savings to any long-term investments, especially if they are not helping you in your Age Pension entitlement.

By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement

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