Impact of inheritance on Age Pension

For many, inheritance is blessing and unexpected improvement of lifestyle and value of the estate, but sometimes it can impact your Age Pension entitlement, and at that point it is hard to figure out: “should I be happy about this new fortune, or would I lose my Age Pension because of it?” 

I received number of messages requesting explaining this topic. And as usual, I will give you some examples. 

“Wisdom with an inheritance is good,  
but wisdom without an inheritance is better than an inheritance without wisdom.” 
Anne Bradstreet

It took me a second to figure out what Anne Bradstreet, an English poet, had in mind when she created that quote. I believe the idea is that if you are lucky enough to be receiving any inheritance, first cherish it with appreciation, but also know what to do with it. Wisdom and knowledge are power.  

So let’s learn what to do if you receive a nice inheritance while on Age Pension.

1. Centrelink will only start counting the inheritance under Income and Assets test once distributed from the deceased estate to you as a beneficiary. Centrelink knows well that sometimes the probate takes longer than few weeks, so they give you 12 months to sort out the estate issues, but if there is a challenge or other major problem, as long as you update Centrelink accordingly, they will not consider those assets as yours until the estate has been finalised. 

However, once you receive your share of the inheritance, you have a duty to notify Centrelink, which is part of your normal reporting obligation. 

2. When you receive the inheritance, it is not treated as an income. I receive this question very often. Inheritance is a lump sum payment you receive, and it is treated like any other asset you own, it is subject to Assets Test and Income Test under deeming rules, just like most other asset you might have. So, I repeat again, inheritance is not treated as income, but rather increase of value of your assets and increase of your deemed income. 

3. The best thing you can do is to prepare yourself for receiving your inheritance, as those will become your extra financial assets. Plan in advance what you are going to do with those assets, especially if the inheritance is going to reduce your Age Pension entitlement or remove it altogether. For example:

• pay off the mortgage, if you have any loan outstanding against your family home – my video “Good debt, bad debt for retirement and Age Pension“ might help you with some ideas how to use those extra funds, you’ve just received as inheritance, 
• use some funds for home maintenance 
• Have a great holiday – for more great ideas, check out my most watched video: “9 ways to legally hide money from Centrelink Age Pension“  
• Use gifting – another great video to watch that explains gifting rules: “Gifting to improve your Age Pension“  
• buy income producing investments or contribute to a super fund to create an additional pension income. I explain this type of income in my video: ”Account Based Pensions – good & bad – explained” 
• Invest into annuities – this is a fantastic way to create an income stream for life for yourself that can also assist with Age Pension, but please get the full advice, as you really need to find the “sweet-spot” of this type of investment and how to mix it with other forms of income for the best income outcome for you. For more details, watch those two videos: “Annuities and your Retirement“ and “Lifetime Annuities and Aged Care Annuities“.  

At the end of the day, there is no right or wrong, it all depends on your financial and personal situation. And this is why financial advice is crucial in this situation. You really need to know how to deal with those extra assets, and how they will impact your entitlement even before you receive your inheritance.  

If you receive an inheritance in the form of an asset such as an expensive piano, paintings, or other item of value, that is treated as a non-financial asset and just like your car or your home contents is counted under Assets Test, but not Income Test.  

So let’s have a look at some real examples of what happens in a situation of receiving an inheritance: 

Mary 

Mary is single receiving the full Age Pension. She lives in her family home, however, really struggles financially, as she still has an outstanding home-loan of $150,000. She always had a problem deciding if she should pay off the mortgage by using her super that is valued at $200,000. Although her income is quite low due to ongoing home-loan repayments, she feels that if she paid it off, that would leave her only with $50,000 back up, which is not that much for the reminder of your life.  

Suddenly Mary received an inheritance. Her best friend passed away and she included Mary in her will for the amount of $350,000. We spend quite some time with Mary going over different scenarios of what to do with the money, as the Age Pension was reduced immediately down to $147pf, which is $3,838pa. 

So we had to do some proper planning and the final decision was as follows: 

• Pay off the mortgage of $150,000 – Mary was thrilled that she finally owned her little cottage she loved so much. 
• Mary decided to give away $10,000 to a charity of her choice 
• For years Mary was a member of a photography club, but she could have never afforded a decent camera, not to mention the beautiful trips her club was organising. She always wanted to go to Antarctica, which appeared to be a dream, but now became a reality. 

So we organised the plan: 

• $150,000 pay off the mortgage – please remember that if you keep money in a bank account, while having a mortgage secured by your home, your cash will be counted under Income and Assets Test, while your mortgage and repayments will be disregarded. This is why it is essential to pay it off. Please watch the video mentioned before “Good debt, bad debt for retirement and Age Pension”
• $10,000 funds for charity 
• $50,000 trip to Antarctica and a beautiful new camera.

Total funds spent $210,000, funds remaining $140,000. Her Age Pension is still reduced by $5,460pa.  

Then we invested $120,000 into a super fund to create a new income stream and $200,000 was invested in an annuity. By doing all that Mary’s income increased dramatically up to $42,898 with Age Pension reduced only by $30.00pf. A huge increase from the previous Age Pension payment of $147pf.  

Sue and Mark 

Let’s meet Sue and Mark both retired on full Age Pension with extra $300,000 in an Account Based Pension, $10,000 in the bank for emergencies and $15,000 in home contents and a car. So their total income is Age Pension of $38,709 plus ABP of $15,000, total income of $53,709. Most people would call it a pretty comfortable living.  

Sue’s mother passed away leaving them $400,000. Once money goes to their bank account, the Age Pension dropped immediately down to $14,841, which is a reduction of $23,868. When I spoke with Sue and Mark, they said that they would like to help their daughter with some money for home deposit, they would like to upgrade the car as it is a bit aged, also renovate their kitchen at home, and they always wanted to experience the Rocky Mountaineer Rail Vacations in Canada.  

So we organised the plan as follows:

• $30,000 given away as a gift to daughter
• $35,000 spent to purchase a new car
• $40,000 new kitchen 
• $30,000 for a Canadian trip 

Total money spent $135,000, but please remember that money spent to purchase a new car although longer counted as a financial asset, therefore not subject to deeming rates, but it is still counted under the Assets Test.  

Then, to ensure that they also have security of income for life, just like they had with full Age Pension before, I also suggested a lifetime annuity of $200,000.  

And now their Age Pension amounts to $29,271, which is an increase of $14,430pa for both. Additionally, they continue receiving their ABP income of $15,000pa and extra income from annuities of approx. $11,000. So now their overall income is $55,271 and they have a beautiful new kitchen at home, and fantastic memories from Canada.  

As you can see, good planning really pays off, but you have to be able to figure out what can be changed and how funds can be utilised for the benefit of the remainder of your retirement. 

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