When determining the entitlements that you are eligible for in relation to the Centrelink Age Pension and some other social security payments, you are assessed using either the ‘Income Test‘ or the ‘Assets Test‘.
Under the income test, some forms of income are favourably assessed for Income Test purposes.
In some cases, the income is not assessed at all.
Income from superannuation account based pensions commenced post 1 January 2015 may not be so lucky, as they will be deemed just like any other investment asset. More on this later.
Got a defined benefit pension? Click here for changes to Centrelink’s assessment of Defined Benefit Pensions as of 1 January 2016.
Income with favourable assessment
Certain income streams such as Allocated Pensions, Account Based Pensions, Market Linked Pensions and Annuities are favourably assessed.
What makes the assessment favourable?
Income such as rental income from an investment property or work income is assessed at face value (i.e. the amount received is the amount assessed for Income Test purposes).
Other types of income is based on a deeming rate. For instance, if you have $50,000 invested in a bank account, it is not the interest received that is counted towards the Income Test, but rather the amount that this $50,000 is deemed to earn.
The higher level of income received may reduce the amount of social security entitlements that you are eligible for. Therefore, by reducing the amount that is assessed, the higher your potential benefits.
Assessment of Income Streams
Most types of income streams are favourable assessed as they include a Centrelink Deductible Amount. The Centrelink Deductible Amount Formula is detailed further below.
USE THE CENTRELINK DEDUCTIBLE AMOUNT CALCULATOR BELOW
Centrelink Deductible Amount Formula
Allocated Pensions, Account Based Pensions, Lifetime Annuties and Market Linked Pension
Deductible Amount p.a. = (Original Pension Purchase Price less Any Commutations throughout the life of the pension) ÷ Relevant Number
Purchase Price = The lump sum amount that was initially used to commence the pension
Commutations = lump sum withdrawals made from the capital value of the pension (not pension payments) since commencement
Relevant Number = Life Expectancy factor based on Life Expectancy Tables
Deductible Amount p.a. = (Original Pension Purchase Price – Any Commutations throughout the life of the pension) ÷ Term of the Annuity
You can find more detailed information using the Guide to Social Security Law.
The Deductible Amount formula also applies to Non Commutable Account Based Pensions.
The Deductible Amount is the amount of your income stream that IS NOT assessed for Centrelink purposes.
The formula to determine the Deductible Amount varies depending on the type of income stream. Click here to access another article I have written regarding ‘Pension Grandfathering Rules’ which may provide a further insight into the Centrelink Deductible Amount Formula.
PENSIONS COMMENCED POST 1 JANUARY 2015
Superannuation Account Based Pension Income Streams commenced post 1 January 2015 may no longer include a Deductible Amount. Instead, the pension balance is ‘deemed’ to earn an income, similar to superannuation accumulation accounts and most other investment assets.
To ensure an income stream is assessed under pre-1 January 2015 rules, it needs to be commenced prior to 1 January 2015 and the pension member must be in receipt of a social security payment or allowance.
If the income stream is commenced prior to 1 January 2015, yet later fully commuted and re-commenced, it will fall under the post 1 January 2015 rules and no longer include a Deductible Amount.
DEFINED BENEFIT INCOME STREAM CENTRELINK ASSESSMENT
The Centrelink deductible amount formula above is not used to determine the income assessment for defined benefit pensions. The assessable income of defined benefit pensions is calculated using the tax free component of the income stream, limited to 10% of gross income. Read more here.
Calculating the Deductible Amount of an income stream for Centrelink purposes using the Centrelink Deductible Amount Formula is a complex area – particularly with new income stream products entering the market all the time. A Centrelink Officer will provide you with an accurate calculation of your Deductible Amount based on your personal circumstances.