Will inheritance affect my Age Pension?
We all dream about winning tattslotto or receiving a great inheritance from a wealthy uncle or an auntie, but it could be a different story in retirement.
In retirement when a pensioner has access to Age Pension as well as fringe benefits that come with the Pensioner Concession Card, this inheritance would need to be of a very high value to justify losing Age Pension and the Pensioner Card altogether.
If you are not sure why I would say that, please read what I consider one of my most interesting and eye-opening: “Real Value of Age Pension in Australia”
After that get to know the value of Concession Card in “Centrelink Concession Card for your Retirement” and “Pensioner Concession Card – the best”
And today we will chat about how receiving an inheritance can affect your Age Pension if you happen to be a beneficiary of the deceased estate.
As we know, in retirement if you become eligible for the Age Pension, it is not just a payment that you are entitled to, but also this magical special Concession Card, that does provide lots of benefits such as medical, pharmaceutical, transport or accommodation concessions.
Centrelink carries out two test to establish your eligibility for Age Pension payments and how much you will actually receive: Income Test and Assets Test. Whichever of the two give the lower outcome of your pension entitlement, this is what you are going to receive.
A sudden increase in value of your assets due to receiving an inheritance, will usually impact both of those tests and consequently can result in a reduction or even a loss of your Age Pension entitlement together with your Concession card.
Let’s look at this example:
Maria is a single lady, 70 years of age, a homeowner with lifestyle assets such as contents and a car both valued at $30,000, cash of $50,000 and a super fund in a pension phase valued at $200,000.
Based on both test, Maria is eligible for the full Age Pension, therefore her income consists of:
- $27,664 Age Pension
- $12,000 Superannuation pension payment
TOTAL INCOME: $39,664
Suddenly Maria received an unexpected inheritance to the value of $200,000.
Maria’s Age Pension will drop immediately down to $13,761, which is a loss of $13,903.
This is not the end of the world, as if Maria receives an appropriate advice, she could receive the equivalent of the lost Age Pension income from the inheritance money.
But let’s look now at Stefan, also a single homeowner with exactly the same assets as Maria, but his inheritance amounts to $500,000.
Now Stefan has just lost the full Age Pension together with all the discounts of the Pensioner Concession Card. This is a huge loss for Stefan and the income earned by his $500,000 inheritance investment will not really be able to cover that loss.
Stefan could gift $10,000 a year up to $30,000 during a period of 5 years, but even this will not help him to keep any of the Age Pension payments.
Stefan could spend some money on home upgrades if needed, take a holiday or participate in some other social activities to reduce his assets value.
Read my most popular article: “9 ways to hide assets from Age Pension legally” to learn how you could reduce legally the value of your assets and improve your Age Pension position.
Stefan would have to reduce his assets by close to $150,000 to keep his Age Pension entitlement, but that would be a very small amount of payment.
And now, let’s see the impact inheritance has on a couple.
Let’s meet Judy and Sasha age 67, they are also homeowners with $40,000 in lifestyle assets, $50,000 in Term Deposit and $20,000 in everyday bank account, plus each partner has $250,000 in super.
Under the Assets Test they are eligible for $564pf Pension payment each, therefore their income is as follows:
- 29,341 combined Age Pension
- $25,000 super pension payment between them
TOTAL INCOME: $54,341
Obviously this level of income and most certainly the level of Age Pension can be improved and maximised with an appropriate advice, so if your situation is similar, feel free to contact me to find out how.
But suddenly they have received an inheritance of $400,000 and their Age Pension disappears altogether.
This is a high loss of income. Yes, they can derive this income from inheritance money, but they will not have the same benefit as in a current situation.
People are often asking me what can be done to prevent this situation, how can we deal with the inheritance situation?
As explained before gifting will only assist to a point, you can only give away up to $30,000 in a 5-year period. If you wish to fully understand it see: “Gifting to improve your Age Pension”.
Sometimes people come with ideas of renouncing their inheritance, meaning refusing to accept it and allowing the next in line beneficiary to receive it instead of you.
Unfortunately, most likely Centrelink will apply deprivation rules, meaning that although you do not have those assets, they will be counted for a period of 5 years as if you had them, and deeming income will also be applied, although you would not be receiving any income from those assets. Therefore, this is not an ideal solution.
Sometimes I get a question if a Testamentary Trust would help. Testamentary trust is a trust created by a Will and does not come into existence until after death of the testator, so a creator of a will.
But if you are listed as a beneficiary, a trustee or you have any other way of controlling the assets of the estate, then those assets would also be counted by Centrelink as yours and will impact your Age Pension eligibility in the same way as if you received those assets from the deceased person directly.
So we know that Testamentary Trust will not assist you with keeping your Age Pension entitlement.
Therefore, what you need to do is:
- Plan in advance – specialist estate planning advice should be obtained at this point
- Receive advice preferable before the event, and if this is impossible then as soon as you possibly can to check what else can be done to keep your Age Pension entitlement going.
You might think that at this point of your life, everything should be easier, but unfortunately in most cases it is the other way around.
This is why not only advice is essential at the starting point of preparing for your retirement, but ongoingly as your life needs change.
If you would like to find out how you could be eligible for Age Pension if you are above the test limits or how to improve your Age Pension if you are only on a part payment, visit my website AboutRetirement.com.au and book a meeting with me, so we can assess your situation.
by: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement
