Investing for Your Retirement 

This information relates to age and service pensions. Information on the income and assets tests in relation to other income support payment should be obtained from Centrelink.

Australia has a social security system based on need and designed to be a safety net for people who are unable to support themselves.

The income and assets tests are used to target the system so that it remains affordable for Australian taxpayers. The tests are kept under review to make sure that the funds available for social security expenditure are targeted to people in the community most in need. Pensions are assessed under both the income and the assets test and the test that results in the lower (or nil) rate of pension is the one that is used to work out their pension rate. If you are a member of a couple, your pension is calculated on your combined income and assts, regardless of which one of you actually receives the income or owns the assets.

Income test

In general, the social security income test uses the gross ordinary income of people and measures income from all sources. Under social security law all income earned, derived or received for a person’s own use or benefit, is counted as income. The only exceptions are those items specifically exempted under social security law. This ensures that social security support payments are targeted to those with the least resources available for their own support.

While serving the prime purpose of targeting social security assistance, the income test is also designed to encourage people to supplement their income support payments with other income. From 1 July 2007 a couple with one or both members receiving a pension can have other income up to $232 a fortnight (combined) before the pension starts to be reduced. This pension income test ‘free area’ is adjusted each year in July for increases in the cost of living using the Consumer Price Index (CPI). For each dollar to income over the income test ‘free area’ the pension is only reduced by 20 cents for each member of a couple. From 1 July 2007 a part pension is still payable up to an income of $2 439.00 a fortnight (combined) for a pensioner couple. The effects of the free area and taper rates means that pensioner couples are always better off receiving additional income.

What is income?

The following are the common types of income that are counted as income for pension purposes:

• deemed income from financial assets
• salaries and wages
• the monetary value of non-income benefits paid in lieu of salary wages
• superannuation pensions
• overseas pensions
• payments from immediate annuities, allocated annuities and allocated pensions
• income from real estate
• profits from farms, private trusts, private companies and other businesses such as partnerships
• income from estates and life interests
• distributions from private trusts and private companies.

Deeming

The deeming rules are a central part of the social security income test. They are used to assess income from financial investments for social security and Veterans’ Affairs pension/allowance purposes. Deeming assumes that financial investments are earning a certain rate of income, regardless of the amount of income they are actually earning. If pensioners earn more than these rates, the extra income is not assessed.

The main types of financial investments are:

• bank, building society and credit union accounts and term deposits
• managed investments, loans and debentures
• listed shares and securities.

From 1 July 2007, a deeming rate of 3.5 per cent applies to:

• the first $39 400 a single customer’s total financial investments
• the first $65 400 of a pensioner couple’s total financial investments
• the first $32 700 of total financial investments for each member of an allowee couple.

A deeming rate of 5.5 per cent applies to financial investments above these amounts. The thresholds at which the higher deeming rate begins to apply are indexed in line with the CPI in July each year.

The lower deeming rate reflects the expectation that customers will generally choose to have savings in investments with very high accessibility and safety, but which tend to provide relatively low income.

The higher deeming rate reflects the expectation that customers with higher amounts savings should seek higher returns on some of their savings, either by accepting relatively lower accessibility (eg term deposits) or by accepting some more risk (eg shares).

However, the deeming rules also create incentives for investors to earn more income from their savings. If pensioners and allowees respond to the deeming rules by investing to get higher returns, their total income will increase. The introduction and application of the deeming system has led to an increase in the total income of the pensioner population.

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The assets test

The assets test is designed so that people with substantial assets, apart from their home, use the assets (either directly or to produce income) to meet their day-to-day living expenses before calling on the social security system for support. The assets test has thresholds before it affects a person’s rate of payment. From 1 July 2007 these thresholds are:

• $166 750 for a single home owner
• $236 500 for home owner couples
• $287 750 for non-home owner singles
• $357 500 for non-home owner couples.

In general, the value used is the current net market value, or the amount which you could reasonably expect to get for the asset if offered for sale on the open market, less any debts owed on the asset. Debts on the asset will include mortgages or secured overdrafts.

Where a person’s rate of pension is worked out under the assets test, the value of their assets above the assets free area currently reduces their pension by $78 a year ($3 a fortnight) for each extra $1 000 in assets. This is known as the assets test taper rate.

From 20 September 2007 the pension assets test taper rate will be halved so that pensioners will only lose $1.50 instead of $3 in pension every fortnight for each $1 000 of assets above the allowable assets limits.

Assets value limits – service pension and age pension

The value of the assets you may own before your rate of pension reduces depends on your marital status and residential situation:

• there are different limits for singles and couples
• as the principal place of residence is an exempt asset, non-home owners are allowed the concession of a higher assets value limit.

The assets value limits for service pension and age pension are:

This means you can have assets up to and including these amounts and still get the maximum rate of pension, provided your income does not exceed the income free area. The assets value limits are adjusted in each July in line with movements in the cost of living.

What are assets?

What assets are assessed?

The following list shows the common types of assets that are counted for pension purposes:

• money in bank, building society and credit union accounts
• investments in shares, managed investments, bonds and debentures
• vehicles (including cars, boats and caravans)
• household contents and personal effects
• businesses, companies and partnerships
• real estate (other than the principal residence)
• properties (including farms) – see notes at end of this list for explanation
• trusts
• life assurance/insurance
• loans
• gifts (totalling more than $10 000 in a financial year or totalling more than $30 000 in a rolling five-year period)
• asset-tested short term income streams
• asset-tested long term income streams
• superannuation funds and rollover funds (such as approved deposit funds or deferred annuities) for pensioners who are over pension age
• cash on hand over $500
• bullion
• collections for trading, investment or hobby purposes.

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NOTE: Assessment of properties:

Two hectares and under

Where the principal home and adjacent land on one title document is two hectares and under the person must satisfy the “private Land Use Test”. That is, the land must be used primarily for private and domestic purposes. This exemption is available to all income support recipients.

Land over two hectares

Where the principal home and adjacent land on one title document is over two hectares the concessional assets test treatment may apply. The pensioner must satisfy the “Extended Land Use Test”, which requires the following criteria to be met. The pensioner must:

• be of age pension age, qualify and be payable for the Age Pension or a Carer Payment, or qualify and be payable for the DVA Service Pension
• have a long-term (20-year) continuous attachment to the land and their principal home and
• satisfy that they are making effective use of productive land to generate an income, given their capacity.

Income generated from the effective use of the land

If income generated from the effective use of the land is going directly to the pensioner qualifying for the concession then it is assessed under the income test in the usual way.

If the income generated from the effective use of the land is going to a close family member working the land then the income is not assessed as being received by the pensioner.

What assets are not assessed?

• the value of investments in a superannuation fund, or rollover fund (such as an approved deposit fund or a deferred annuity) but only until you reach pension age or start to draw an income stream from the fund
• the value of an interest in a granny flat or sale leaseback home (conditions apply)
• the value of a cemetery plot for you or your partner and pre-paid funeral expenses
• an amount in an exempt funeral investment (up to $10 000 from 1 January 2008)
• aids and appliances for a disabled person
• the value of medals awarded to you
• the value of the former home in which you resided prior to you becoming an aged care resident, for up to two years from the day you entered a care situation
• the value of a lump sum accommodation bond paid to a residential aged care facility
• principal place of residence which you own for up to 2 years whilst you are absent from that residence because you are personally providing community based care to another person
• the value of the former home in which you resided prior to you becoming an aged care resident, but only if you are:
  • paying an accommodation charge and renting out your former home, or
  • paying an accommodation bond wholly, or partly by periodic payments while renting out your former home.

If you sell your principal home the proceeds of the sale will be an exempt asset for 12 months, up to 24 months in some circumstances, as long as you are planning to use the proceeds to buy another home. You will be deemed to be earning interest on the proceeds in the meantime, however, and this will be counted under the income test.

Pension Bonus Scheme

The pension bonus scheme encourages people of age pension age to defer claiming the Age Pension while continuing to work. People who choose to continue working can accrue a tax-free lump sum at the time they claim and receive the Age Pension. The size of the bonus is linked to the number of years a person defers Age Pension and keeps working (up to a maximum of five years) and to the rate of Age Pension payable when it is granted.