Monday, February 21, 2011

Super & Allocated Pensions – under the age pension age

The last post we discussed the issues surrounding allocated pensions and ‘money in the bank’.

What we did not highlight was the implications should a partner be under the age pension age.

If a pensioner has a partner under the age pension age, then super assets of that partner are not taken into account. However if the partner starts an allocated pension / income stream, then the asset value, and income will come into the Centrelink pension calculations.

Swapping the allocated income stream back to an accumulation phase super will reverse the treatment by Centrelink.

Wednesday, February 16, 2011

Allocated Pensions vs ‘Money in the bank’

A few press articles of late, and a few clients confused on the impact on their pension. Seems to be based on the belief that it is better to take the money out if their allocated pension (life time pension) and put the money into the bank.

Whilst there are many issues, we will simplify the key Centrelink points to provide a basis of understanding before discussing the issues with a financial advisor.

As an example, let’s say a client has an allocated pension of $200,000. Now roughly speaking, Centrelink will allow the client to draw down on that pension without impacting on the income test. For example, if the client had a life expectancy of 20 years when the allocated pension started, then withdrawals/income of less than $10,000 pa ($200,000 / 20 years) will not be counted as part of the income test. Amounts in excess of $10,000 pa would come under the income test.

Now if the client took the money out and placed it in a bank, all the money would be ‘deemed’. So, if the client was single, then the client may be assessed as ‘earning’ more than $8,000 pa; potentially meaning a pension loss of up to $4,000 pa.

Other example are provided on the Governments FAHCSIA page provided below

http://www.fahcsia.gov.au/guides_acts/ssg/ssguide-4/ssguide-4.9/ssguide-4.9.2/ssguide-4.9.2.30.html

Sunday, February 6, 2011

Sale of a Home and the Assets Test

Another big week for a client. The client had advised Centrelink of changes to his assets – as he is required to do, and he 'lost' the pension.

He provided new bank balances which included proceeds from the sale of his home - $500,000. Unfortunately he did not advise Centrelink that it was his home that was sold, and the new asset levels placed him over the threshold for the pension!

We corrected the Centrelink records which resulted in him being provided with 12 months exemption from the assets test for the proceeds if the house sale; and we were also able to get him rent assistance for the period.

He was not on the same full pension as previously, as he was benefiting from the proceeds being invested in a term deposit. In simple terms he had invested the $500,000 in a term deposit of 6%; therefore receiving approximately $30,000 per annum in interest. Therefore Centrelink reduced his pension by 50cents in the dollar for this interest - $15,000 pa.

Instead on the original full pension of $716pf, he now receives less than $140pf from Centrelink. But he also receives the equivalent of more than $1150pf in interest. His new new total income level is more than $1300pf, much more than he was previously receiving, and better that the original Centrelink outcome of no pension at all! Plus he is getting rent assistance.

A word of warning though, his ‘cash flow’ is severally impaired as he was not going to get his interest payment until the end of the term – yet his pension was immediately affected. He is now altering his term deposit to enable a better cash flow.

Wednesday, January 26, 2011

Pension Loans Scheme

People of age pension age (or their partners) who are not eligible for a pension because of either their income or their assets, or those who only receive a part pension, can access capital tied up in their real estate under the Pension Loans Scheme.

For example, if you were on a part pension because of your assets, but you needed more income. Pension Loans Scheme would allow you to be paid the full pension, with the difference between your part pension and the full pension being treated as a loan. Interest is charged on the loan and a mortgage is taken out over the property by Centrelink or the Department of Veterans Affairs.

Monday, January 17, 2011

Loans taken out against the home

“What happens if a pensioner takes out a $100k loan out against the home?”

As with salary sacrifice, negative gearing etc. Centrelink treats the loans completely different to the ATO. Under Centrelink rules, loans taken out and secured over a person’s home are not counted as a liability, no matter what purpose they have been taken out for.

If the money was taken out and placed into the bank – any account, savings, term deposit etc. –
Centrelink will:

• Add the $100k to the pensioner’s assets for the purpose of the assets test
• Add the deemed income to the income test, and
• The interest paid on the loan will not be taken into the account to reduce the deemed income.

Of course if – say - $60k was used for renovations, then only the remaining $40k will be used to adjust the Centrelink assets and income values. However, again no recognition will be made of the interest being paid on the $100k loan. That is, your ‘deemed income’ will not be reduced by these interest costs.

This is different if the loan was taken out against an investment property. In this case the asset value of the investment property is reduced by the property mortgage. However any loan amount taken out against the ‘family’ home, for the purpose of this investment property, would not be taken into account in a similar manner to above.

Tuesday, January 11, 2011

Pension Bonus Scheme

This week we assisted a client achieving more than $40,000 from the Pension Bonus Scheme.

NOTE: Whilst the Pension Bonus Scheme has been cancelled, those who were registered before the scheme ceased, can still apply. Also those who failed to register before that date, but are eligible can still apply.

He had worked the required 5 years and believed he was eligible. He had sold his company 6 months prior claiming the age pension.

Centrelink had treated this as him not working for this 6 month period, and therefore not eligible for the bonus. However we submitted that in fact one of the conditions of the sale of the company was that he was providing consulting services to the new owner, under the contracted succession plan.

His bonus was then paid.

The Pension Bonus Scheme was a work test, not income test.

Work Bonus Scheme - WBS

The Work Bonus Scheme has been promoted as a replacement for the - now cancelled - Pension Bonus Scheme. Centrelink promote the scheme as “an incentive for pensioners over pension age to participate in the workforce”.

Under the new Work Bonus, half of the first $500 of fortnightly employment income will be disregarded from the income test for pensioners over Age Pension age. This means the maximum allowance is $250 per fortnight. This is in addition to the normal allowable income free threshold.

For example:
a) If a pensioner earns $400 per fortnight, then Centrelink will only treat $200 as part of the income test – i.e. maximum WBS allowance of 50% of wage.
b) If a pensioner earns $800 per fortnight, then $550 will be accessed under the income test – maximum WBS of $250 per fortnight.
c) If a pensioner earns $100 in the first fortnight and then $700 for the next – the WBS benefits will be $300 for the month ($50 + $250). Whereas, if the pensioner earned the same monthly amount ($800), but reported $400 per fortnight, then the WBS benefit would be $400 ($200 + $200). An increased WBS benefit of $100 for the month.

The Work Bonus is an automatic benefit with no application required.
The Work Bonus applies to income such as:
• Wages paid in, and outside, Australia
• Directors fees.

However there are a number of areas where the Work Bonus Scheme pensioners need to be careful:

Exclusions:

Partner under age pension - earnings will only attract the Work Bonus if they are over age pension age, and on a pension.

Non Wage Earnings - The Work Bonus applies to employment income such as wages and director's fees. It does not apply to “other income such as leave, investments, superannuation, or payments to a principal from a sole trader or partnership”. When the scheme first came into effect pensioners who were excluded from the new WBS included some ‘lollypop’ traffic controllers, newspaper deliverers etc. who were paid as contractors. In these cases we were therefore able to claim expenses for items such as travel costs, to achieve similar benefits.

Tuesday, January 4, 2011

Gifting

Our first blog entry will be comments on an often mistreated gifting rule. Often pensioners will accidently misrepresent the purpose of the money, and be adversely treated by Centrelink. While the pensioner may use the term ‘gift’ to Centrelink, depending on the use of the money it may be ‘ignored’ by Centrelink.

Centrelink will only allow a gift of $10k per year, or $30k over 5 years. Hence if a pensioner gifts $100k, the reduction in assessed asset base will be as follows:
Year 0 $100k
Year 1 $90k
Year 2 $80k
Year 3 $70k
Year 4 $70k
Year 5 $70k
Year 6 $0
Noting that independent of the value of the gift after 5 years the gift value will be ignored by Centrelink.

Centrelink say…
"Gifts may be assessed for 5 years from the date of transfer and deemed income will apply".
"Gifting does not include you selling or reducing your assets to meet normal expenses, for example, to buy consumer goods like a fridge or washing machine, for home maintenance/improvements, or to pay for holidays. Nor does it include payments for services received, e.g. lawn mowing".

So pensioners need to be very clear on what, or how, the gift was made.

One of our clients gave their children $300,000 to help them buy a house so that they all could live in the same house and be ‘looked after’. Centrelink treated this as a gift – as our client used the word gift –and Centrelink only reduced their assessed assets by $10,000. This meant that $290,000 continued to be assessed as earning interest in the bank – deemed income- and their part pension was not altered significantly, even though they had less income and assets.

We organised for the full $300,000 to be treated, not as a gift, but as a life interest housing option – a granny flat. Their assets were reduced by the full $300,000 and they gained the full pension.

Equally a pensioner could provide their children board/food money in advance and this may necessarily not be treated as a gift.