I am often asked how the Age Pension Income Test and Assets Test inter-relate with each other when a person’s age pension entitlement is determined?
The simple answer is that both tests are applied separately to a person’ s circumstances.
The test which provides the lowest Age Pension entitlement, is the test which will apply in determining a person’s entitlement.
An example may provide a better overview and make it easier to understand
Mary is a single person who owns her home; a motor vehicle valued at $15,000; personal and household contents of $10,000; bank accounts of $55,000 and a share portfolio of $250,000.
As a single person, Mary will lose 50 cents in every dollar of her age pension entitlement for every dollar of income above the current threshold of $178 per fortnight. Mary’s income will be assessed by applying the current deeming rates of 0.25% and 2.25% to her financial assets – bank account and share portfolio.
When we apply the income test to Mary’s situation, she would be entitled to an age pension of $930.10 per fortnight.
If Mary is single and owns her home, for every $1,000 in assets she owns - excluding her home – above the current threshold of $268,000 she will lose $3 per fortnight of her age pension entitlement.
When we then apply the assets test to Mary’s situation, she would be entitled to an age pension of $766.70 per fortnight.
So therefore, Mary’s age pension entitlement after applying both tests is the lesser of the two amounts - $766.70 per fortnight paid under the assets test.
I hope the example has made it a little easier to follow.
But what happens to Mary’s age pension if her circumstances change? Will she always be paid her entitlement under the assets test?
Let us return to Mary and continue our example.
Mary has sold her motor vehicle, her personal and household contents remain the same at $10,000, her bank balance is unchanged at $55,000, however because of a correction in the share market her share portfolio has fallen to $210,000.
The deeming rates which are applied to Mary’s financial assets under the income test have increased slightly to 0.75% and 2.75% *.
As a result of a change in the value of her assets, under the assets test Mary is entitled to an age pension of $931.70 per fortnight.
As a result of a change in the value of the share portfolio and the deeming rates, Mary is entitled under the income test to an age pension $921.95 per fortnight.
Now I understand that there is not much difference to Mary’s entitlement under either the income or assets test, however as her entitlement is less under the income test this is the test which would now apply to Mary’s age pension entitlement.
So, as you can see it is extremely important to try and understand how your age pension entitlement is calculated and whether your entitlement is assessed under the income or assets test.
If your age pension is entitlement is assessed under the assets test, then changes in the value of your motor vehicle as you can see in our example can have a profound effect on your age pension. So, keeping Centrelink or Veterans Affairs up to date with these changes is very important from a financial perspective.
If you are still confused, you should talk to someone who understands how age pensions are calculated, who can help to ensure you are receiving your correct entitlement.
*The increase in the deeming rates I have used in the example in this blog is not an indication that there will be an increase anytime soon. Deeming rates can be found at: https://www.servicesaustralia.gov.au/individuals/topics/deeming/29656