The relationship between Allocated Pensions and Centrelink is important to understand.
Your allocated pension will affect the level of Age Pension that you are entitled to.
This article explains how your Allocated Pension affects your Centrelink entitlements and what can be done to improve your benefits.
It also details how the change in rules, as ofg 1 January 2015, affected the assessment of Allocated Pensions.
Got a defined benefit pension? Read this.
Basic Eligibility Assessment for Centrelink Age Pension
The level of Centrelink Age Pension that you are entitled to is based on two tests:
Whichever test results in the Government paying you the lowest level of Age Pension entitlements is the test that will be applied.
It should go without saying that the higher your income and/or assets, the lower Age Pension benefit you will receive.
Allocated Pension Centrelink Assessment – Income Test
In relation to Centrelink, an Allocated Pension is assessed in the following manner:
The annual income that you receive from your Allocated Pension is assessed under the Income Test for Centrelink purposes. However, the income that you receive is reduced by the ‘Centrelink Deductible Amount’.
The Deductible Amount is intended to represent the capital component of your Allocated Pension income stream and is therefore not assessed as Income. The Annual Deductible Amount is calculated as follows:
(Purchase Price of Pension – Commutations since inception)\ Relevant Number
This amount will generally remain static throughout the life of the pension, however should definitely be recalculated at the beginning of each year, as it will be affected and change as a result of any commutations that are made.
The Income that is assessed is the gross pension payment less the Deductible Amount.
For example, it you received pension payment of $2,500/month and the Deductible Amount was $14,500 p.a. The only income that would be assessed for Centrelink purposes would be $15,500 p.a.
More information about the Centrelink Deductible Amount Formula and Commutations
How to increase the Deductible Amount
As you get older, the Relevant Number used in the calculation of your Deductible Amount will reduce, as it is based on your life expectancy.
Therefore, if the capital balance of your pension was to remain at a similar level, your Deductible Amount for Centrelink purposes could increase by refreshing the pension (rolling back your pension to accumulation phase and commencing a new pension), as the Purchase Price would be divisible by a smaller number, which would increase the Annual Deductible Amount.
You just need to ensure that any costs associated with refreshing the pension, time out of the market and other administrative and legislative requirements make this strategy a worthwhile and compliant exercise.
RELATED ARTICLE: ‘Defined Benefit Income Stream Schedule for Centrelink Assessment Purposes‘
Allocated Pension Centrelink Assessment – Assets Test
The total value of an Allocated Pension is assessed under the Assets Test for Centrelink Age Pension purposes.
Pensions Commenced from 1 January 2015.
Allocated Pensions commenced from 1 January 2015 will no longer include a Centrelink Deductible Amount. Instead, these pensions will be ‘deemed‘, just as a superannuation accumulation account would be and most other investment assets.
To ensure that an Allocated Pension is captured under ‘deductible amount’ rules, it will need to have been commenced prior to 1 January 2015 and the pension member would need to have been in receipt Centrelink entitlements at that date. It will also be important not to ‘refresh/recast’ this pension at any stage, as this would constitute a new pension commencing.
If you would like anything clarified or have any further questions about Allocated Pensions and Centrelink or any other topics, please do not hesitate to leave a comment.