The legacy of hard work and dedication is often embodied in the inheritance left behind by loved ones.
Yet, navigating this honour while on the age pension can introduce a maze of considerations that can impact your financial situation.
Australia’s age pension system is means-tested, which means that inheriting property, money or other assets could affect your payments.
At First Financial, we understand that your retirement finances have been carefully planned and considered, making this a particularly complex time to inherit anything.
Here’s what you need to know about how inheritances impact your pension, the options available and the strategies you might consider.
How the asset and income tests work
James Wrigley, Principal at First Financial, explains, “If the assets you receive push you above the upper threshold for the asset test, it could mean you get cut off from the age pension.” Therefore, understanding the impact of these changes is essential, not because it’s necessarily a negative outcome, but to avoid surprises and plan ahead effectively.
The age pension is subject to both asset and income tests, which determine your eligibility and the amount you will receive. Inheriting property or money means these assets will be assessed and counted towards these tests. The asset test evaluates the total value of your property, shares, savings and other assets, while the income test considers the income generated from these assets.
For example, if you inherit a property that generates rental income, Centrelink will consider that income when finalising your pension eligibility. Similarly, inheriting a lump sum of money could immediately affect your pension because it would increase your overall assets.
What happens if you exceed the limit?
As mentioned above, exceeding the threshold can lead to a loss of pension payment, whether full or partial reduction. “So, what do you do in this circumstance? Essentially, you accept that you have more money. If you’ve exceeded the threshold on either test, you can likely live off your own assets and still enjoy life,” says James.
The key is to adjust your financial planning to reflect your new circumstances. We recommend consulting your financial adviser to explore how best to utilise your inheritance to secure your financial future without relying on the age pension. While losing the age pension may seem concerning, this additional wealth can offer greater freedom and flexibility if managed wisely.
Can I gift the inheritance?
While many retirees consider gifting their inheritance, this strategy won’t help avoid losing their pension. Centrelink has strict gifting rules that prevent deprivation, which occurs when individuals give away money or assets to reduce their assessable assets and avoid the asset test.
Once you receive that money, it’s considered yours for the next five years, regardless of whether you still have it. Under these rules, any amount given above $10,000 in a single financial year, or $30,000 over five years, will still count as part of your assets during that period.
For example, let’s say Cherie just inherited $100,000 from her parents following their passing. Cherie is 70, retired and receiving an age pension.
If she decided to gift $50,000 to her children to reduce her assessable assets, Centrelink would still count that amount against her for five years, potentially impacting her pension eligibility.
Estate planning considerations
If you’re concerned about how an inheritance will affect your pension, one option, though not the easiest, is proactive estate planning.
If the willmaker is still alive and able, you can suggest adjusting the will so that the assets pass directly to someone else, such as your children, rather than to you.
“This option is one to discuss with an estate planning lawyer, as there may be ways to gift the money without receiving it directly; however, there will be many technicalities involved, and it must be done correctly.”
Proper estate planning can help you manage the impact of an inheritance while still ensuring your loved ones are cared for.
Talk to the financial planning experts
Inheritance is a wonderful gift. If you’re financially secure and your retirement is well-planned, this shouldn’t be a time of panic or confusion. You can use your wealth wisely to support your ideal retirement lifestyle.
At First Financial, we have years of experience helping clients retire ready for life.
If you’re wondering how to navigate a recent inheritance or anticipate one in the near future, we can assist you.
To learn more or to get started on the pathway to wealth, contact a member of our team today.
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