Recent Age Pension changes, made by the government, have presented new possibilities to many older Australians.
We have seen the media focus on cuts to deeming rates which offer a potential increase to payments and greater eligibility.
With this in mind, we thought we’d look at how the Age Pension works, what impact the recent deeming rate reductions will have and what you can do to make sure you are receiving your full entitlement.
Who can receive the Age Pension?
Australian residents who meet the Age Pension age requirements may be entitled to receive income support based on a range of criteria.
The Age Pension age requirements are currently transitioning. Historically, you had to be at least 65 years old to receive the pension, but from 1 July 2019 this changed. You now must be 66 years old and by 2023 this age will increase to 67.
Your residency status is also important, as you must be an Australian resident, living in Australia, when you submit your Age Pension claim. You need to have been a resident for at least ten years in total, with a minimum of five consecutive years. There are some exemptions to this rule, so it is worthwhile reviewing the guidelines set out by the Department of Human Services.
The amount you receive is dependent on your relationship status, as singles and couples receive different rates. It is also subject to both income and assets tests that determine your financial situation and can reduce the amount of pension you receive or make you ineligible if your income or assets exceed the limits.
The dollar value of assets you own, such as investment properties, financial investments, business assets and even household contents, is calculated when evaluating your Age Pension entitlement under the assets test.
The income test separately reviews all sources of income, including income earned from your financial assets, for example superannuation, term deposits or listed shares. The rules used to determine the assumed rate of income earned from your assets are known as ‘deeming’. This assumed rate of return is used regardless of what your assets actually earn. Both the assets test and the income test are applied, and your pension amount is decided by whichever test has a lower value.
Changes to deeming rates
At the beginning of July, the deeming rates were reduced to align with recent cash rate reductions made by the Reserve Bank of Australia.
As a result, the lower deeming rate has decreased from 1.75% to 1.00% for single pensioners with financial investments up to $51,800, and for couples with investments up to $86,200. The upper deeming rate has been cut from 3.25% to 3.00% for balances over these amounts.
The last time deeming rates were changed was in March 2015, and since then the Reserve Bank of Australia has cut the cash rate five times, reaching a new low of one percent in July. Given this significant reduction in interest rates, this change will be welcome news to many Australians who may have been earning less than the deeming rate from their savings.
However, if your pension rate is based on your assets test, these changes are unlikely to have any effect on the amount you receive or your eligibility. But, if your pension is calculated under the income test, you could see benefits that increase your rate or now qualify you to receive payments.
Those who are eligible to receive a higher pension will have to wait until 20 September 2019, when pensions are next adjusted for inflation, to receive their increase. The increase will be backdated to 1 July, which means almost one million recipients will receive a lump sum at the end of September.
Managing your retirement income
Whether you are affected by deeming rate changes or not, managing your finances in retirement can be complicated. You want to make sure you are receiving as much income as you can from all available sources. This includes superannuation or annuity income streams, financial investments and of course, any government benefits.
The government has some helpful resources, such as the Centrelink Financial Information Service, but it is also worthwhile considering the services of a qualified financial adviser. They can help you navigate all the options available to you. They understand the tax considerations and can offer advice about your asset structure and ownership to ensure you are receiving the maximum benefits to which you’re entitled.