How does age pension work?

Alex Brewster By on September 9, 2019
 
How does age pension work??

Photo by Sven Mieke on Unsplash

The age pension is often in the media spotlight, but how many of us can say we actually understand it?  

Australian pension

It’s no secret that Australia, like many countries around the world, has an ageing population. According to the Department of Social Services, 13% of us are over the age of 65, but that number is expected to grow to 25% by 2047. Meanwhile, a report from the Australian Institute of Health and Welfare found 2.5 million people aged 65 and over received at least a partial pension in 2017, representing 66% of older people. 

So it’s likely that upon retirement, you, or someone you know, will be eligible for the age pension. And there’s no shame in that. After all, you’ve probably paid hundreds of thousands in taxes over the years, so perhaps it’s time you got something back.

But ahead of hanging up the work boots, it’s important to understand exactly what you’re entitled to so you can plan and budget your retirement accordingly. To help, we’ve put together this brief guide to the age pension.

Let’s start with the basics.     

What is the age pension?

The age pension is a Government income support payment, designed to support older Australians who need it. Paid on a fortnightly basis, the scheme also encourages pensioners to maximise their overall incomes. 

Who can get the age pension? 

This might seem like a straightforward question but it can actually get pretty complex. There are three tests set out to see whether an individual is eligible for the pension. You must: 

  1. Be at least 66 years old
  2. Be an Australian resident 
  3. Meet an income and assets test

Easy right? Not quite.

The age test

The Australian Government recently began increasing the age at which you can start receiving the age pension. Use the table below to see if you’re affected and if you qualify.

Your birthdateYour Age Pension ageDate of Age Pension age change
1 July 1952 to 31 December 195365 years and 6 months1 July 2017
1 January 1954 to 30 June 195566 years1 July 2019
1 July to 31 December 195666 years and 6 months1 July 2021
On or after 1 January 195767 years1 July 2023

Residency test

As well as being an Australian resident, to qualify for the age pension you must be in Australia on the day your claim is lodged and satisfy one of the following criteria:

  • Be an Australian resident for a total of at least 10 years, with one stay lasting for at least five years consecutively;
  • Be receiving Widow B Pension, Widow Allowance or Partner Allowance immediately before reaching pension age;
  • Be a woman whose partner died and have been a resident for two years prior to claiming

Former and current refugees are exempt from the ten-year rule. 

Pension means test

Applying for the age pension will require the Department of Human Services (DHS) to find out the scope of your wealth and how much money you’re eligible to receive. There are two tests used to find this out: the income test and the assets test.

It’s important to note that although both of these tests will be used, only one will be applied to your pension: the one that results in the lower pension rate. 

The pension income test

The DHS defines assessable income as the gross employment income you earn from work. Examples of this include: 

  • Wages
  • Income from financial investments
  • Income from superannuation funds
  • Dividends from a private trust or company
  • Income from outside Australia, including non-Australian pensions

Some investments and assets will also be subject to deeming rates. Deeming rates are a pretty complex topic. To drastically summarise, deeming is a set of rules that the DHS will use to estimate your income from your financial assets. It assumes these assets earn money, regardless of whether they actually do or not. Check out our article on deeming rates for a full explanation. 

Examples of assets subject to deeming rates include:

  • Bank accounts
  • Term deposits
  • Managed investments, loans and debentures
  • Listed shares and securities 

How much can you earn on the pension?

There are different rules depending on your relationship status, regarding how much you can earn and how that will affect your pension. 

Singles

If your income per fortnight isyour pension will reduce by
up to $174$0
over $17450 cents for each dollar over $174

A couple living together or apart due to ill health 

If your income per fortnight isyour pension will reduce by
up to $308$0
over $30850 cents for each dollar over $308

If you earn too much money for the fortnight you’ll reach the ‘cut-off point’ and won’t receive a pension payment for that period. You’ll find those amounts in the table below. 

If you’reyou won’t receive a pension payment when your income reaches
single$2,026.40
a couple living together$3,100.40
a couple living apart due to ill health$4,012.80

All info in the tables above accurate as at August 2019. 

How much assets can you have on the pension?

As well as defining your income, the DHS is required to find out the wealth of your assets to see if these will affect your payment rate. 

Examples of assets include:

  • Real estate that’s not your residential home 
  • Financial and superannuation investments
  • Motor vehicles
  • Jewellery 
  • Life insurance policies 
  • Cryptocurrencies 

Assets that fall into these categories that are overseas will be converted into the equivalent Australian dollar amount. 

There are some notable exceptions to items you might have thought of as assets, referred to as exempt assets. Examples of this include

  • Your residential home and surrounding land up to two hectares 
  • Your residential home, if you vacate it for up to 12 months or two years if entering a care situation 
  • Any property or money left to you in an estate, which you can’t get for up to 12 months
  • A cemetery plot or prepaid funeral 
  • Aids for people with disability 

If you enter an aged care facility, your residential home may be considered an exempt asset indefinitely, on the provision: 

  • You entered the facility before 1 January 2017
  • You’re renting out your former home
  • You’re paying or are liable for an accommodation charge 

Once the DHS has figured out how much your assets are worth, they’ll see if these exceed the asset test limit. These limits, which you’ll find below, are updated every January, March, July and September each year. 

For every $1,000 of assets you have over these limits, your pension will be reduced by $3 every fortnight. 

If you’reHomeownerNon-homeowner
Single$263,250$473,750
A couple, combined$394,500$605,000
A couple, separated due to illness, combined$394,500$605,000
A couple, 1 partner eligible, combined$394,500$605,000

Info accurate as at August 2019


How much is the age pension? 

Now we’ve got through the super simple topic of who can get the age pension, we can look at how much you could actually receive. 

The maximum pension rates are broken down into the basic rates, the pension supplement and the energy supplement. The pension supplement is a regular extra payment designed to help with bills and medicine costs, likewise the energy supplement for energy costs. 

Check out the rates in the table below. 

Per fortnightSingleCouple eachCouple combinedCouple apart due to ill health
Maximum basic rate$843.60$635.90$1,271.80$843.60
Maximum pension supplement$68.50$51.60$103.20$68.50
Energy supplement$14.20$10.60$21.20$14.10
Total $926.20$698.10$1,396.20$926.20

Info accurate as at August 2019 

Do the rates change? 

Yes!

Base pensions are indexed twice a year, on 20 March and 20 September, to keep them in line with Australia’s cost of living. This is measured by growth in the Consumer Price Index (CPI) and the Pensioner and Beneficiary Living Cost Index, whichever is higher.

The wages benchmark sets the combined couple rate of pension at 41.76% of Male Total Average Weekly Earnings. The single rate of pension is two-thirds of the couple rate. 

Work bonus 

The Work Bonus provides an incentive for pensioners to work by allowing them to work without significantly reducing the amount they’re receiving in their pension. It does so by not assessing the first $300 of fortnightly income from work, in line with the pension income test free area, as of 1 July 2019.

So for example, a single pensioner could earn up to $174, plus the work bonus of $300, totalling $474, and still receive the maximum rate of pension. 

For those pensioners not working, don’t fear, you’re not missing out! If you’re not working, and not using the work bonus, that $300 fortnightly exemption amount accrues in a work bonus income bank. 

From 1 July 2019, the maximum amount that can accrue is $7,800. This amount then offsets future income from work that would otherwise be assessable under the pension income test. Best of all, it never expires! 

*Note: Prior to 1 July 2019, the work bonus amount was $250 a fortnight and the maximum amount that could be accrued in the work bonus income bank was $6,500. 


Case studies 

Here are two different absolutely real-life people, whose situations you can hopefully relate too, to see how much of the age pension you can receive. We’ve heavily simplified these cases, just to give you a vague idea of how the pension works and put a practical spin on the tests involved. 


Pan Shon

Pan is a 79-year-old Australian, living in the home he bought 30 years ago. He’s lived the bachelor lifestyle since his youth and can play a round of golf in two hours. We can see Pan passes both the age and residency test.

Pan receives income from superannuation and has some money in savings and term deposits, so fortnightly he earns $500.Therefore, as he is above the pension income test free area for a single, of $174, his pension will reduce by 50c for every dollar above this amount. This comes to $163, which taken from the maximum pension rate for a single of $926.20, would allow him to receive $763.20 a fortnight. 

However, we also need to apply the asset test to see if that would deduct more or less from the pension amount.         

Pan’s assets include some savvy investments and a sleek new Porsche, totalling $300,000. As this exceeds the asset limit for a single homeowner of $263,250, we must subtract $3 from the pension for every $1,000 above that limit. 

This would be a reduction of $110.25 from the maximum pension rate for a single of $926.20, allowing him to receive $815.95. 

As the DHS requires you to be paid at the lower rate of payment, Pan would be assessed under his income test and receive a part pension of $763.20 a fortnight. 


Andy and Fran 

Andy and Fran (Frandy) are 70-year-old British immigrants. They’ve been together 50 years and live in an aged care facility. They moved to ‘Straya in 2002 and received citizenship in 2006, living here for the entirety of that period and therefore pass the residency test.  

Let’s apply the income test to Frandy as we did above with Pan. As former Sheriff of Nottingham, Andy receives a tidy sum from England, while Fran has some savings from a real estate business, with the pair’s total income coming to $1,500 fortnightly. This is above the pension income test free area for a couple of $308, so their pension will reduce by 50c for every dollar above this amount. 

This comes to $596, which taken from the maximum pension rate for a couple of $1,396.20, would allow them to receive $800.20 a fortnight. However, we also need to apply the asset test to see if that would deduct more or less from the pension amount. 

Due to Fran’s wheeling and dealing in the real estate business, the two have three lucrative investment properties, which totals their assets at $1.5 million. As this exceeds the asset limit for a homeowner couple, combined, of $394,500, we must subtract $3 from the pension for every $1,000 above that limit. 

This would be a reduction of $4,500 from the maximum pension rate for a couple, combined, of $1,396.20. As a result, Frandy would unfortunately not receive a pension payment. 


How to apply for an aged pension?

Savings.com.au has outlined the steps below to help you through the aged pension application process:

  1. Prepare to claim – Hopefully, you’ve already done this based on the information we’ve provided above. Double-check your eligibility and have your paperwork ready regarding anything the DHS might require information on. 
  2. Get ready to claim – The easiest way to claim is online and to do this you need a myGov account linked to Centrelink. You can verify your identity with a birth or citizenship certificate and two other documents that confirm your identity in the community, like a drivers license or passport. If you can’t claim online you can call the DHS on the ‘Older Australians line’, go to a service centre or print and complete the ‘Claim for Age Pension and Pensions Bonus form’ and the ‘Income and Assets form’. 
  3. Make your claim – Sign in to myGov and go to Centrelink. Select ‘Payments and Claims’ from the menu, then ‘Claims’, then ‘Make a claim’. Under ‘Seniors’, select ‘Get Started’. From here, you’ll be prompted to answer a number of questions and submit any necessary documents. 
  4. Track your claim – After submitting you’ll get a receipt confirming your submission, the ID number of your claim, the estimated date your claim will be complete and a link to track its progress online. You’ll be notified of the result of your claim via a letter to your myGov inbox, Centrelink online account or your letterbox. 

What do I do if my situation changes?

Circumstances change, that’s just a part of life. You must notify the DHS if: 

  • Your address changes
  • Your income changes
  • Your assets change
  • Your partner’s income or assets change
  • You stop living with your partner
  • Your partner dies
  • You marry or start living with your partner

You’ve got 14 days to let the DHS know of the changes. If you don’t they might pay you too much and you’ll have to pay it back. 

Can I still get the pension if I go overseas? 

Essentially yes, however, the length of time you’re going for and where you’re going is a major factor. 

You need to tell the DHS you’re leaving Australia if you:

  • Are going to live in another country
  • Will be away for more than six weeks
  • Get payments under a social security agreement with another country
  • Came back to live in Australia within the last two years and started getting Age Pension since then

If you don’t fit into one of these situations then you needn’t tell the DHS of your travel plans.

When you leave Australia for less than six weeks, your age pension won’t normally change. Leaving for longer than this will see your Pension Supplement drop to the basic rate and your Energy Supplement stop. If you leave Australia for longer than 26 weeks, your rate may decrease based on how long you’ve been a resident. If you’ve been a resident for more than 35 years, your rate won’t normally change, while less than this will see you get a lower rate. 

If you leave Australia to live in another country your Pension Supplement will drop to the basic rate and your Energy Supplement will stop. You’ll also get an ‘outside Australia rate’ on your age pension. These are a separate set of thresholds and limits for Australian expats regarding how much they can receive on the age pension. 

Savings.com.au’s two cents

There’s a wealth of information in this article regarding the age pension and it may seem overwhelming. However applying is pretty straightforward, provided you’ve got personal and financial information handy. 

It’s also important to note that the pension doesn’t just apply to those of pension age; start planning for your retirement now, however old you are! 

The pension provides older Australians with a great safety net should they need it, but you can arguably retire more comfortably by staying on top of your super and staying in control of your finances. 

In today’s low-interest environment, it’s more difficult to grow your money in a traditional savings account. Consider investing in ETF’s and talk to a financial adviser on setting up your finances for your future. 

Alex Brewster
Alex joined Savings.com.au in 2019. He is passionate about providing Australians with the information and tools needed to make them financially stable for their futures.

Collections:

Latest News
Essential Guides
Subscription Form