By Mark Teale on 1 November 2018
Some weeks ago, I wrote a blog called ‘Is it time to apply for an age pension?’, which looked at the complexities and frustration of the application process. Some readers have asked the question - when should a person look at whether they would qualify for an age pension?
For many people, applying for the age pension is not something they think about until they are close to the qualifying age.
However, I believe that rather than waiting 13 weeks before you reach the necessary age, you should be looking at your situation five years before your qualifying age.
The qualifying age, as I have previously mentioned, depends on your date of birth and can vary between 65 and 67. As an example, a person born on 20 August 1956, would qualify at the age of 66 and a half. Those born after 1 January 1957, will need to wait until they turn 67.
So, for all those people who turn 62 after 1 January 2019, next year is the year you should review your circumstances and determine whether you may qualify for an age pension.
Why five years you may ask? For those people who see the age pension as a very important component of their retirement income, five years is an extremely important period.
As an example, consider the following situation -
Picture a couple - the husband is turning 62 and his wife is 60. They own their own home, a couple of cars, have $85,000 in bank accounts and term deposits. Due to of a lifetime of work, they currently have a total of $650,000 in superannuation. Over the next five years through the strategy of salary sacrifice and investment growth, their super is expected to grow to around $800,000.
Their assets assessed for age pension purposes in five years could be close to $900,000, including their cars household contents and cash. Based on today’s upper asset threshold for a home-owner couple - $848,000 – they would not qualify for an age pension. However, given the annual adjustment in the age pension and the thresholds at the age of 67 he may qualify for a small pension.
Of course, this all sounds very reasonable and based on their financial assets they should be able to achieve the comfortable lifestyle that they hope for when he retires at the age of 67.
The missing factors in this scenario are their children!
Their children are adults, they are married, have children of their own, but are struggling financially.
The couple have promised that when they do retire, they will help them out by gifting them $100,000 each – three children a total of $300,000.
The downside to this plan is that in five years when they gift $300,000 to their children, and the husband applies for his age pension, Centrelink will maintain a gift of $290,000 for five years as a asset and deem income on this $290,000, when assessing his entitlement to an age pension.
This process will also affect her age pension entitlement when she applies two years later, on turning 67.
As this couple had not reviewed their situation in respect of their plans to gift money to the children, or the age pension legislation, they will find themselves in a less than comfortable position as their age pension entitlement is significantly less than what they had factored into their budget.
It is extremely difficult to ask for the money back once you have gifted the funds to the children.
Believe it or not - this situation occurs on a regular basis. The number of people who gift money to their children, for very good reasons, and then expect their age pension to increase to compensate for the funds that they have gifted, is a lot more common than we think.
Now, I am not saying that what this couple intends to do is wrong. What I am saying is that they need to review their position and make some decisions now.
If they do not have the funds to gift to the children at this moment and they still plan on giving $300,000 to the children in five years when they retire, they are at least aware of the consequences, are able to make plans.
Always remember to talk to someone and for the purposes of any age pension entitlement, do not leave it until just before reaching age pension age. If you do plan on gifting money to your children, make sure you do so five years before you turn age pension age. Because, the deprivation rules don’t apply to the money or things you have given away more than five years previously.