Newsletter Volume 2 Edition 2

Sent April 2012

Financial Income at Centrelink  April 2012

Centrelink pension benefits are subject to an Income Test and an Assets Test.  Once a person has met the eligibility conditions for an Age Pension or Disability Support Pension the amount of pension payable is subject to means testing.  The amount of pension reduction is calculated under the Income Test and under the Assets Test.  The Test that generated the higher reduction is the Test that is applied.

Income at Centrelink for a the purposes of the Age Pension Income Test includes
• Superannuation pensions, for example, State Superannuation Scheme pensions
• Rents from investment property
• Wages from work (some concessions apply)
• Director’s fees and dividends from private companies
• Deemed income from ‘financial investments’ but not the actual interest and dividends received.

Financial investments at Centrelink include
• Bank, building society and credit union accounts
• Term deposits, unsecured notes and debentures
• Friendly society bonds but not ‘exempt funeral bonds’
• Church and charitable development funds, but some types of account are exempt
• Any other money you have loaned including loans to family trusts and companies
• Managed investments including insurance bonds and property, equity, cash or mortgage trusts or investment funds
• Shares in listed or unlisted public companies
• Cash, gold and other bullion
• Superannuation fund investments held by people who have attained Age Pension Age ( age 65 years for males and currently 64 years 6 months for females), including approved deposit funds, deferred annuities, self managed superannuation funds and allocated pension accounts
• Certain income streams including most short term annuities but excluding many longer term annuities and Asset Tested income streams
• Gifts of money or other assets during the preceding 5 years in excess of $10,000 in any financial year or $30,000 in the last the 5 years.  Read about Centrelink and Gifting at Newsletter Vol 1 Ed 9

Deemed income from financial investments

Under the Pension Income Test, your income from financial investments is assessed under the ‘deeming’ rules.  Deeming assumes that your financial investments are earning a certain rate of income, no matter what income they are actually earning.

From 20 March 2012, a ‘Single at Centrelink’ person is deemed to earn income at 3% per annum on the first $44,600 of financial assets and 4.5% per annum on any balance above $44,600.

A ‘Couple at Centrelink’ is deemed to earn income at 3% per annum on the first $74,400 of their total financial assets and 4.5% per annum on any balance above $74,400.

For means testing purposes, all of the assets owned by a ‘Couple at Centrelink’ are counted as assets of the couple irrespective of whether the individual assets are owned jointly or in individual names.  For more information about ‘Who is a Couple at Centrelink’ read Newsletter Vol 1 Ed 3

Note that the ‘deeming rates’ of 3% and 4.5% are set by the Commonwealth and can be changed at any time.  In contrast, the changeover amounts of $44,600 for a Single and $74,400 for a Couple at Centrelink are usually subject to an ‘indexation increase’ effective each July.

The major Australian banks offer Pensioner Accounts offering with interest at the deeming rates.  Thus a Single at Centrelink Age Pensioner could earn exactly the amount of interest that Centrelink deem her to be earning by placing all of her financial investments into the one Pensioner Account.

Consider Mary an elderly widow with $60,000 of financial assets.  Mary spends all of her pension each fortnight so that her capital savings amount does not change during the year.

Centrelink deem Mary to be earning 3% pa on $44,600 and 4.5% pa on the last $15,400, that is, an annual interest amount of $2,031.  If Mary placed all of her $60,000 in a Pensioner Account for the full year she would expect to be credited with interest of $2,031.

But Mary does not want to have all of her money in the one account so she considers splitting it between two banks.  If she keeps $30,000 in a Pensioner Account at each of two major banks then each bank will treat her as having only the $30,000 eligible for the deeming rate.  Thus Mary would be credited with interest at the rate of 3% pa on each account generating a total of $1,800 of interest for the full year, that is, two accounts each credited with $900.  Mary realised that using two Pensioner Accounts gave her less interest than Centrelink deemed her to be earning so she would not use that approach.

Mary then sought some financial advice.  Mary wanted to keep $10,000 ready for unexpected bills but she was willing to place the other $50,000 into a 12 month term deposit.  The major banks were offering 12 month term deposit with 5% interest which looked good to Mary.  The interest earned on the Pensioner Account will be $300 for the year, as it is all deemed to be at 3% pa.  The 12 month term deposit earned 5% on $50,000, that is, $2,500 payable in a lump sum at the end of the year.  Thus Mary earned a total interest income of $2,800 for the year compared with a deemed income of $2,031.

In summary, the actual amount of investment income could be different from the deemed amount.  If a pensioner wants to replicate the deemed income then all financial assets might need to be held in the one Pensioner Account at a bank.

About Us

Clients of Financial Care Services receive impartial confidential financial advice from an actuary.  Financial Care Services is an independent professional financial advisory service which holds Australian Financial Services Licence number 299570.

Clients are charged flat fees for advice and assistance; no upfront commissions are accepted in respect of clients’ investments.  Home visits and out of hours appointments are available to assist client families.

For more information call Christine on 9808 0338 or visit www.financialcareservices.com.au

Financial Care Services specialises in advising seniors through life’s transitions.

Remember, referring your clients for impartial professional financial advice enhances your profile and reduces the potential for later complaints.

Christine Hopper
Fellow of Institute of Actuaries of Australia
Director and Authorised Representative
Financial Care Services
Telephone 03 9808 0338
www.financialcareservices.com.au