Welcome to the second part of our series explaining the tricks of the age pension system.
Remember, you are tested under both an income and an assets test, and the one that produces the least pension is the one used. There is age pension calculator and a deeming calculator on my website noelwhittaker.com.au
Most wealthier pensioners are asset tested, yet I keep receiving emails from them asking if it's okay to earn some more money. Of course it is - the income test is not relevant if you are asset tested.
A single person with assets of $540,000 receiving a pension of $136.70 a fortnight could have assessable income of $45,000 a year including their deemed income, and employment income, without affecting their pension because they would still be asset tested.
Your own home is not assessable, but your furniture fittings and vehicles are assets tested. Many pensioners fall into the trap of valuing them at replacement value.
This could cost them heavily because every $10,000 of excess assets reduces the pension by $780 a year. Make sure these assets are valued at garage sale value, not replacement value.
There is no penalty for spending money on holidays, living expenses and renovating the family home. But don't do this just to increase your pension.
Think about it, if you spend $100,000 renovating your home your pension may increase by just $7800 a year - but it would take almost 13 years of the increased pension to get the $100,000 back. Of course, the benefit of money spent should be taken into account too - money on improving your house, or travelling could have huge benefits for you. The main thing is not to spend money with the sole purpose of getting a bigger age pension.
Each year on March 20 and September 20 Centrelink values your market-linked investments, such as shares and managed investments, based on the latest unit prices held by them.
These investments are also revalued when you advise of a change to your investment portfolio or when you request a revaluation of your shares and managed investments. If the value of your investments has fallen, there may be an increase in your payment - if the value of your investments has increased, then your payment may go down.
The rules are in favour of pensioners. If the value of your portfolio arises because of market movements you are not required to advise Centrelink of the change - it will happen automatically at the next six-monthly revaluation. However, if your portfolio falls you have the ability to notify Centrelink immediately.
You can reduce your assets by giving money away but seek advice. The Centrelink rules only allow gifts of $10,000 in a financial year with a maximum of $30,000 over five years. Using these rules you could gift away $10,000 before June 30 and $10,000 just after it, and so reduce assessable assets by $20,000.
There is devil in the detail. If a member of a couple has not reached pensionable age it's prudent, if appropriate, to keep as much of the superannuation in the younger person's name because then it is exempt from assessment by Centrelink. However, the moment that fund is moved to pension mode, it's assessable irrespective of the age of the member.
A common trap is when a loan is used to purchase an investment property with the loan secured by a mortgage against the pensioners own residence.
The principle is that a debt against an investment asset is not deducted from the asset value, unless the mortgage is held against the investment asset. If the mortgage is secured against an asset other than the investment asset the gross amount is counted for the assets test and the loan is not deducted.
The effect on the pension could be horrendous.
Noel answers your money questions
We are currently on a part pension with an investment in shares only that pay dividends and franking credits. I do have one question regarding dividends that we receive and the gifting rules, is giving a monetary gift to a sibling part of the gifting rules if you are not altering the asset that Centrelink look at?
The gifting rules do not turn on the fluctuating value any assets - they are all about making a payment to another person. The limit is $10,000 per financial year, with a maximum of $30,000 over five years.
Could you please explain how the 10 year bond yield increasing affects share markets.
An increase in long-term bond rates mean there is a general expectation that interest rates in general are trending upwards. Rising interest rates have huge implications for the economy.
If mortgage rates start to rise, household disposable income will drop as mortgage payments increase, and property prices may start to fall in many places due to reduced demand, and the possibility of forced sales happening.
When you own a share, you are owning a part of a business. Increased interest rates mean higher costs for those businesses if they borrow, and possibly less demand for their products as their customers have less money to spend.
That's the theory but, as Ashley Owen of Stanford Brown points out, in the real world rising bond yields have actually been accompanied by rising share prices in half of all bond yield spikes. The reason is that rising bond yields and rising inflationary expectations are also a result of strengthening economic activity, and this flows through to higher company revenues, profits and dividends, all of which are positive for share prices.
I am a widow of 80 years old. I own my own home worth approximately $550,000 but apart from my old age pension which totals $30,513 per annum I have no other income. As I am very healthy I feel I need more income to sustain my way of life.
Could you please advise me if a reverse mortgage is the way to go or are their other ways of supplementing my income. I have savings of only $40,000 which is decreasing every month. I estimate that I have shortfall in my income of $20,000 and if I did get a reverse mortgage would this affect the existing pension?
Apart from taking on jobs such as babysitting, a reverse mortgage may be appropriate in your situation and I believe the Pension Loans Scheme product from Centrelink is probably the best for you.
The interest rate is 4.5 per cent which is reasonable, and the drawdowns are made fortnightly just as your pension is paid to you.
This means there is no initial large lump sum to start growing. There would be no adverse effect on your pension. If you have a family make sure they are closely involved in the decision - it may be more practical for them to give you some money each year rather than be stuck with a growing debt which will be taken from your estate when you die.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: firstname.lastname@example.org