Understanding the Age Pension means tests
To understand how your superannuation affects your Age Pension eligibility, you must first grasp how Centrelink's means tests work. Centrelink assesses your financial situation using two main tests: the assets test and the income test. The test that results in the lower pension payment is the one that is applied.
The assets test
This test assesses the total value of your assets, including your superannuation, bank savings, investments, and other possessions. The family home is generally exempt, but its value is relevant to the asset thresholds for homeowners and non-homeowners. Your eligibility for a full or part pension depends on the value of your assets compared to the current limits.
The income test
The income test evaluates all your sources of income, including employment and any deemed income from financial assets. For the income test, Centrelink uses a 'deeming' rate to calculate the income your financial assets—like bank accounts, shares, and super—are assumed to be earning, regardless of the actual return.
The risks of spending down your super
While withdrawing and spending your super might seem like a way to reduce your assessable assets, there are significant risks and rules to consider.
Centrelink's deprivation rules
Centrelink has rules to prevent people from intentionally reducing their assets to qualify for a higher rate of pension. This is known as 'deprivation' or gifting. If you give away money or assets above the allowable limits, Centrelink may still count that amount as an asset for a period of up to five years.
For example, the current gifting limits allow you to give away up to $10,000 in a financial year, with a maximum of $30,000 over a rolling five-year period. Any amounts gifted over these limits are still included in your assets test for five years.
Financial vulnerability
Spending your super quickly to access the Age Pension is a financially risky strategy. The Age Pension is designed to be a safety net, and relying on it solely can leave you with a more basic standard of living than you may desire. Without a buffer of savings, you may be left vulnerable to unexpected costs, such as medical expenses or home repairs, during what could be a lengthy retirement.
Comparison: Spending super versus managing assets
| Feature | Spending Entire Super | Managing Assets Strategically |
|---|---|---|
| Effect on Centrelink Assessment | Can be viewed as deprivation if given away, potentially affecting Age Pension eligibility for five years. If spent, the new asset (e.g., car) is assessed, or the lower asset value is reflected if consumed. | Assets are controlled, keeping them within Centrelink thresholds. Income from investments is deemed, not the actual earnings. |
| Retirement Income | Solely dependent on the Age Pension, which offers a fixed, often basic, income. | Can supplement Age Pension payments with a managed super income stream, providing greater financial flexibility and comfort. |
| Financial Security | High risk of running out of money for unexpected costs during retirement. | Lower risk, as a portion of super remains invested and accessible for both regular income and contingencies. |
| Flexibility | Limited flexibility once funds are depleted. Dependent on government payment rates. | High flexibility to manage an account-based pension, including accessing lump sums when needed. |
The process and implications of super withdrawal
If you choose to withdraw a lump sum from your super after reaching the preservation age and a condition of release, such as retirement, you must inform Centrelink. The way the withdrawn funds are assessed depends on what you do with them:
- If you put the money in a bank account: It will be included as a financial asset under both the assets test and the income test (through deeming).
- If you spend the money on an exempt asset: An example is spending the money on renovations to your home, which is generally an exempt asset. While this could lower your assessable assets, it's crucial to seek financial advice to confirm your specific situation.
- If you spend the money on an assessable asset: If the funds are used to purchase an asset that is not exempt, such as a holiday home, it will be assessed as an asset.
It's important to report these changes to Centrelink within 14 days to avoid overpayment.
Strategic retirement planning
Rather than spending down your super entirely, many people take a balanced approach to maximise their retirement income. This often involves combining a managed super income stream with the Age Pension.
One common strategy is to transfer your super into a retirement income stream, such as an account-based pension, once you are eligible. This provides a regular income while the rest of the funds remain invested. The balance of this income stream is still counted as an asset, but it can provide a more flexible and robust financial plan than simply relying on the Age Pension.
For more detailed and personalised advice, it is always recommended to seek guidance from a qualified financial planner before making significant decisions about your retirement funds.
Conclusion
The idea of spending your entire super to qualify for a full Age Pension is possible but is a high-risk strategy that could leave you financially vulnerable. Centrelink's strict deprivation rules mean that giving away assets above a low threshold will not work as a method to circumvent the assets test. Moreover, by draining your super, you lose a valuable tool for providing flexible income and managing unexpected costs in retirement. A more strategic and balanced approach, such as combining a managed super income stream with a part Age Pension, generally offers greater financial security and a more comfortable retirement. Navigating these complexities correctly is essential for a stable financial future, so seeking professional financial advice is highly recommended.
Keypoints
- Deprivation rules: Centrelink will penalise you if you dispose of assets, including super, to qualify for or increase your pension payments.
- Gifting limits: Gifting more than $10,000 in a financial year (or $30,000 over five years) may result in those assets being counted for five years.
- Assets and income tests: Even if you spend your super, any remaining funds or assets purchased with it will still be assessed under Centrelink's assets and income tests.
- Financial risk: Relying solely on the Age Pension after depleting super can leave you vulnerable to unexpected financial shocks.
- Alternative strategy: A more common and safer approach is to use a superannuation income stream in conjunction with a part Age Pension to create a more flexible and reliable income.
Faqs
Q: What is Centrelink's deprivation rule? A: The deprivation rule is designed to prevent people from giving away assets or spending large amounts without reasonable cause solely to qualify for or increase their Age Pension. If you exceed the allowable gifting limits, the disposed asset amount will still be counted in your assets test for five years from the date of the gift.
Q: How does Centrelink know if I have spent my super? A: When you withdraw your super, you are required to inform Centrelink. They will then assess what you have done with the funds. If the money is moved into a regular bank account, it will be counted as a financial asset. If it's used to buy another asset, that asset will be assessed.
Q: How much can I gift without affecting my Age Pension? A: You can gift up to $10,000 per financial year, with a maximum limit of $30,000 over a rolling five-year period. Any gifts over these amounts will be counted as an asset for five years.
Q: Can I spend my super on my home to increase my pension? A: Spending money on renovating or improving your primary residence, which is an exempt asset, could potentially lower your assessable assets for the pension. However, this is a complex area and requires seeking professional financial advice to avoid any negative impacts.
Q: What is the Age Pension assets test? A: The assets test is one of two means tests used by Centrelink to determine your eligibility and payment rate for the Age Pension. It assesses the total value of your assets, including your super, investments, and other possessions, but generally excludes your family home.
Q: What is the Age Pension income test? A: The income test assesses all sources of income, including employment income and 'deemed' income from financial assets like savings and super. The higher your income, the lower your Age Pension payment will be.
Q: Is it a good idea to spend my super quickly to get the Age Pension sooner? A: No, this is a very high-risk strategy. It relies entirely on a basic government payment and removes your financial buffer, leaving you vulnerable to unforeseen expenses and potentially hindering your lifestyle in retirement. A more strategic approach is generally recommended.
Citations
- Services Australia. Income test for Age Pension. servicesaustralia.gov.au
- Services Australia. Assets test for Age Pension. servicesaustralia.gov.au
- MLC. Gifting rules in practice. mlc.com.au
- Life Financial Planners. Can I Spend My Entire Super and Then Get the Age Pension? lifefinancialplanners.com
- SuperGuide. Starting a pension from your super. superguide.com.au
- Equip Super. Can You Get a Centrelink Age Pension and Super Together? equipsuper.com.au
- Aware Super. Government Age Pension eligibility. aware.com.au
