by Hosanna Smith
There’s only a few months to go before changes to the Centrelink assets test go into effect. This could mean for some, there won’t be much to celebrate when the new year comes. Some age pensioners will see an increase in their payment, however the majority will either see a reduction or removal of their pension altogether.
The latest asset threshold reductions
The long awaited confirmation of the assets test cut-out amounts that will apply from 1 January 2017 for Government Income Support pensions have been released and are slightly lower than previously reported by the Department (see below).
Eligibility for the Age Pension will cut out for a single home-owner when they have more than $542,500 worth of assessable assets from 1 January 2017. For a home-owning couple the cut-off will be $816,000.
This begs the question; is there anything you can do to minimise the impact of the changes?
Firstly, it’s important to do a self-check on all your financials that are currently held on your Centrelink record. If you have registered through MYGOV online, you can check this information online, under “My Profile”. You can also phone Centrelink or go into a Centrelink office and request a detailed statement of your income and assets. Compare their records with your current asset values. Make amendments where necessary.
- Make sure they don’t still have closed accounts listed, and make sure all your accounts are on the list and they haven’t missed anything.
- If your asset values are under-disclosed you risk owing money to Centrelink, and if your assets and income are higher what they actually are, you may not be receiving your full entitlement. The best situation is an accurate one!
- For such assets as household contents, cars, boats and caravans, Centrelink will usually accept your reasonable estimate. They work off the net asset market value (not the full replacement insurance value). I.e. if you had to dispose of those assets second-hand, how much would you receive?
How can I reduce my assessed Centrelink assets?
Great care should be taken when considering strategies that could dramatically lower your assessable assets, as they may be short-sighted. For example, if the income test deeming rates (which are at historically low levels) were to rise significantly, the benefits of reducing your assessable assets, could be reduced considerably.
Purchasing burial plots, Funeral Bonds and prepaid funerals
Any amount used to purchase a pre-paid funeral or burial plot may be exempt under the assets test as long as certain conditions are met.
A burial plot is a specific place or a right to be interred at a general location, for example, a cemetery plot, an internment niche or mausoleum or in any available plot in a specific cemetery. A burial plot is not included in your assessable assets, regardless of its value. You do not have to tell Centrelink about a burial plot that you own.
Prepaid funeral expenses
Prepaid funeral expenses exist where you have arranged and purchased your funeral in advance. The type and style of funeral you want is set out in a contract and paid for at an agreed price. You can pay this directly to the funeral director, who will invest the funds in a funeral trust, or you can purchase a funeral bond and assign the benefit to the funeral director. The risk that the investment will not keep pace with rising funeral costs lies with the funeral director. You will not need to pay any more if prices rise. The payment cannot be refunded unless you move outside the designated funeral service area.
Centrelink will not include any of the amount that you prepay to a funeral director (or invest in a funeral bond that is assigned to a funeral director) provided you have a contract that sets out the services to be undertaken where no more expenses need to be paid. You do not have to tell Centrelink about any pre-paid funeral expenses, unless you also own a funeral bond.
Funeral bonds, sometimes known as funeral investments, are managed investments that earn interest, but have the following specific features:
• the interest must be added to the capital
• the capital and interest is only realised on death when it is paid to the estate or funeral director to cover funeral expenses, and
• your money is invested in an independently managed funeral fund.
You can invest in a funeral bond in your own name or in joint names, and in a lump sum or instalments. Centrelink will not include the value of up to two bonds provided the following two criteria are met:
• you do not also have prepaid funeral expenses
• the amount invested in the bonds to be exempted does not exceed the Funeral Bond Allowable Limit. This is currently $12 250 and is indexed in line with CPI pension increases every 1 July.
When you invest in a funeral bond, Centrelink will need to know how much has been invested and whether it is individually or jointly owned. If you have more than one and you do not know which, if any, of your bonds can be exempt, you will need to provide documentation that shows the amount invested in each bond, their current value, and your contract with a funeral director.
For funeral bonds that are not exempt, you must tell Centrelink the current value including any interest received to date, and whether it is individually or jointly owned. You must also tell Centrelink when the value of a non-exempt bond increases (you should receive an annual statement from the provider advising this).
You or your partner can give away money, other assets or income to any value you choose at any time. Before you make a gift, you should carefully consider the effect it may have on your financial security and Centrelink. Remember, a gift is not a loan. If you loan money or an asset to a family member, with the intention they will pay it back, then this will still be assessed as your asset and will not be considered a gift.
Allowable gifting amount
A single person has a gifting free area of $10,000 per financial year, limited to $30,000 per 5 financial years. A couple has a total combined gifting free area of $10,000 per financial year, limited to $30,000 per 5 financial years.
If you gift more than the allowable amount
Any gift or gifts with a total value greater than the allowable amounts will be assessed as a deprived asset for 5 years from the date of gift and will be subject to the income deeming provisions. This may change if a gift is returned.
Improving or upgrading your home
If there’s anything around the home that needs to be repaired or replaced, think about getting that work sooner rather than later. As your home residence is an exempt asset, any money spent on improving the home would also be exempt.
Do you have a younger spouse who hasn’t reached their age pension age?
If you have a partner under pension qualifying age, then holding funds in the accumulation phase within their super may be worthwhile. The reason? Assets in the younger spouse’s super remain exempt until that person reaches age pension age.
For example – Ted is 67 and married to Mary aged 63. Ted is eligible for an Age Pension. Mary is not eligible until she turns 65 ½. Ted could withdraw his super and contribute the money into Mary’s super account and not have that amount assessed against his Age Pension, until Mary turns 65 ½.
However, there are a number of factors to consider before using this strategy, such as your overall cash flow, the tax rate on investment earnings within your super account and potential restrictions on access. You would also need to consider the maximum super contribution limits. So make sure you discuss your position with us to work out whether this is a good decision for you.
Consider the use of long-term annuities
Long term annuities are those with terms greater than five years. Centrelink will initially base its assessment of the asset value on its purchase price and will reduce it every six or 12 months by the amount of the purchase price that has been returned to you. If the annuity provides for a return of capital at the end of its payment term (called a residual capital value), Centrelink will not assess an asset value lower than this amount. This could be an attractive option to take in the current environment of low interest rates. It can be difficult to work out what type of annuity is right for you, so make sure you discuss your requirements with us before doing so.
By-passing the spouse in estate proceeds
It may be that when one member of a couple dies, the surviving spouse may not require the whole asset base of the couple to provide the required income for the rest of his or her life. In such a case, where appropriate, it is possible for a person to structure their Will such that some part of their estate passes to the couple’s ultimate beneficiaries, usually their children and their families. This is not considered a gift for pension means testing if structured and executed correctly, and may allow the surviving spouse to receive a greater age pension entitlement than they otherwise would have if they retained all of the couple’s assets in their name.