Andrew Biviano explains how the Centrelink income test for an account based pension is calculated.
The amount of income assessed by Centrelink for those with an account based pension is influenced by the gross annualised pension payment amount less a deduction amount. On the other hand, the Centrelink asset test only requires the account balance to determine the assessable asset value.
It should be noted that for Centrelink purposes an account based pension is considered to be an asset tested income stream (long-term).
Unlike asset tested income streams (short-term), which generally have a term of five years or less unless the term of income stream is greater than the person’s life expectancy, an account based pension (including non-commutable) is not deemed.
Gross annual payment amount
Interestingly, the income assessed by Centrelink for an account based pension does not always equal the amount of the pension payments received by the pensioner.
Why does this happen?
This occurs because the amount used by Centrelink for the calculation is based on the sum of the pension payments received (or to be received) within a financial year grossed-up and expressed as an annual amount.
To do this formula 1 is used.
Consider the following example. Timothy, who is aged 66, commences an account based pension on 1 July and nominates a pension payment of $2,000 per month ($24,000 per annum), which represents 8 per cent of his $300,000 account balance.
In this case, from a Centrelink perspective, as the days from commencement until 30 June and the days in the financial year are the same, the gross annual payment amount for Centrelink purposes would be $24,000.
If, however, Timothy decided to start his account based pension at a time other than the start of a financial year, it is likely that the amount received and the amount used by Centrelink would not be equal.
Consider if he started the income stream on 1 May this year and requested that he receive monthly payments of $2,000.
While the actual amount he receives this year would be $4,000, the amount calculated for Centrelink purposes would be $23,934 ($4,000 x 365/61).
Graph 1 helps illustrate the actual annual amount received by Timothy in comparison to the gross annual pension amount used by Centrelink for various commencement months during a 365-day financial year.
Amount assessed for the income test
As mentioned earlier, although this is the amount Centrelink considers to be the gross annual pension amount, it is not the amount used for the Centrelink income test.
This amount is calculated using formula 2.
What is the relevant number?
The relevant number for an account based pension is based on the life expectancy factor of the pensioner.
It remains the same for the life of the account based pension and is not affected by partial commutation. Importantly, where the account based pension is established as a reversionary pension, the relevant number is the greater of the pensioner’s and the reversionary pensioner’s life expectancy factor.
It should also be noted that the relevant number is based on the commencement date of the pension using the applicable life table published by the Australian Government Actuary (AGA) every five years.
Table 1 provides a summary of the applicable AGA Life Tables.
Applying this to Timothy’s situation where his pension commenced at the start of a financial year, the amount that would be counted as income for Centrelink purposes is $7,108 ($24,000 - $300,000/17.76).
Meaning that in Timothy’s case, the Centrelink deduction amount is equal to $16,892 ($300,000/17.76). Graph 2 illustrates the actual amount received versus the amount that would be counted as income for Centrelink purposes for different commencement months in a 365-day financial year.
Importantly, if Timothy decides to make his account based pension reversionary to his spouse, Rhonda, who is aged 62, this impacts the relevant number used and also affects the amount that is counted as income for Centrelink purposes.
In fact, the Centrelink deduction amount would decrease from $16,892 per annum to $12,381 per annum, which means the amount of income assessable for Centrelink purposes would increase to $11,619 per annum ($24,000 — $300,000/24.23).
The impact of a commutation
While there is currently little difference from a tax perspective between a pension payment and a lump-sum payment made to a person who is aged 60, the same cannot be said when it comes to Centrelink.
Where a person took a partial commutation from their account based pension, this would generally impact the amount counted for the Centrelink income test. Recall, the amount counted as income is based on the purchase price, less any commutations divided by the unchanged relevant number.
To illustrate, consider the case where Timothy decides to take an $8,000 commutation. Timothy’s Centrelink deduction amount would decrease to $16,441 [($300,000 — $8,000)/17.76].
Taking this one step further, how would the Centrelink income test be impacted if Timothy commenced his pension on 1 July, but on 1 March the following year decided to bring forward the rest of the financial year’s payments into a single payment as a commutation?
From a Centrelink perspective, the gross annual payment amount would be reduced to $16,000 per annum ($2,000 x 8 months), as commutations are not included in the calculation.
The Centrelink deduction amount would fall to $16,441 per annum, which for this financial year means that the assessable amount for the Centrelink income test would be nil, as the deduction amount is greater than pension payments received.
However, for future years, if payments returned to $2,000 per month, the assessed amount would increase to $7,559 due to a lower Centrelink deduction amount applying.
On the other hand, if Timothy decided not take it as a commutation but as a ‘single’ pension payment, the Centrelink assessable amount and the deduction amount would remain unchanged at $7,108 and $16,892 per annum, respectively.
Andrew Biviano is technical and paraplanning manager at Fiducian Portfolio Services.