The defined benefit pension Centrelink asset test is based upon the capital value of the income stream.
The nature of defined benefit pension income streams is that they do not have a capital value.
If you refer to your defined benefit income stream schedule for Centrelink assessment purposes, it should note the income stream as being asset test exempt.
An asset test exempt income stream means that no value of the income stream will count towards the Centrelink assets test.
Defined Benefit Pension Centrelink Asset Test
The defined benefit pension Centrelink asset test amount will most often be be nil.
The reason for this is that there is no capital amount supporting the pension.
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A defined benefit pension has no residual capital value, meaning it cannot be redeemed by the pension recipient at any stage and no capital lump sum will be paid to beneficiaries upon the recipients death.
Some or all of the income stream, however, may continue to be paid to the recipient’s beneficiary (i.e. spouse) upon death.
Despite having no capital value, a formula is used to calculate an effective capital value of a defined benefit pension for Transfer Balance Cap purposes, introduced on 1 July 2017.
Read more about the Transfer Balance Cap assessment of defined benefit pensions here.
Defined Benefit Income Streams After January 2016
From 1 January 2016, defined benefit income streams had the deductible amount, for Centrelink income test purposes, limited to 10%.
Previously, the tax-free amount of an income stream was classified as the deductible amount for the Centrelink income test.
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The tax-free deductible amount was detailed on the income stream schedule for Age Pension Centrelink assessment purposes.
For example, if you were in receipt of a defined income stream annual payment of $40,000 and the tax-free amount was $10,000, then only $30,000 would be counted towards the Centrelink income test.
However, from 1 January 2016, the deductible amount of this same income stream would be limited to $4,000, due to the 10% rule; meaning $36,000 would count towards the Centrelink income test.
Despite this assessment rule change, the defined benefit pension Centrelink asset test treatment amount remains at $0, as a defined benefit pension is exempt from Centrelink Age Pension asset test assessment.
Centrelink Treatment of Lifetime Annuities
Lifetime Annuities Assets Test
Generally, the Centrelink treatment of lifetime annuities for asset test purposes is based on the purchase price and the deductible amount.
Specifically, upon initial purchase of the lifetime annuity, the full purchase price counts towards the Centrelink assets test.
The assessable asset amount of the annuity is then reduced every 6 months by 50% of the annual deductible amount of the income stream.
However, this is a general rule of thumb only.
Lifetime income streams can have different characteristics which may affect the Centrelink asset assessment.
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Lifetime Annuities Income Test
The assessment of an annuity income stream for Centrelink income test treatment is based on the actual income received, minus the deductible amount.
The deductible amount is calculated by dividing the purchase price of the annuity by the life expectancy (relevant number) of the recipient.
However, it is always best to confirm the deductible amount and assessable asset value against the Centrelink schedule, because annuities can have various options, including being reversionary, which may affect the deductible amount and therefore Centrelink assessment.