This year’s Federal Budget was basically announced before the Treasurer confirmed many of the rumours circulating. One unsurprising announcement was the closing of the pension bonus scheme (PBS) to new entrants from 20 September 2009 and its replacement with a work bonus scheme (WBS).
The Pension Review headed by Dr Jeff Harmer identified the current PBS as too complex and not encouraging to older people wishing to participate in the workforce after reaching age pension age.
The pension bonus scheme
The PBS commenced in July 1998 and provides an incentive for older Australians if they defer claiming the age pension, age or partner service pension, or income support supplement by remaining in the workforce. Under the scheme, the government pays a tax-free lump sum.
As a general rule, the precise value of this lump sum may be difficult to determine due to the different circumstances that apply. However, the longer the deferral period, the greater the bonus is likely to be.
For example, the pension bonus for someone who defers receipt of the pension for three years can be equal to 84.6 per cent of the person’s annual pension entitlement and deferral for five years can be equal to 235 per cent.
To be eligible for the pension bonus, an individual must:
n Qualify for the age or service pension when the claim for the bonus is lodged (age pension – 65 for males, 63.5 for females; service pension – 60 for males and 58.5 for females);
n Continue to be gainfully employed for at least 960 hours each year (approximately 20 hours each week on average over 48 weeks for the year);
n Accrue the bonus for at least 12 months, but not for more than five years. It is not possible for age pensioners to accrue the bonus past age 75 and for Department of Veterans’ Affairs (DVA) service pensioners past age 70;
n Lodge a claim for the bonus and age/service pension at the time the member wishes to receive and qualifies for the bonus and pension payments. Registration can be lodged within 13 weeks of reaching the relevant pension age. Where registration is lodged outside that period, the accrual period will not commence until Centrelink or DVA has registered the claim;
n Register as a member of the PBS with Centrelink or the DVA, as appropriate;
n Keep a written record of employment, including the employer’s name(s), type of work and dates/hours worked.
It is possible for a couple to register under the PBS with only one partner meeting the work test. Where both members of the couple are working, the work hours cannot be combined to satisfy the work test requirements.
To satisfy the work test, a pensioner must undergo a substantial degree of personal effort for gain or reward. Pensioners who manage their own financial affairs would not generally constitute gainful employment.
Work records are required to be maintained for the whole accrual period. Centrelink and DVA have forms that can be used for these purposes. In some cases, Centrelink may need verification of employment details from the pensioner’s employer, for example, PAYG summaries and income tax returns.
There are a number of circumstances under which the pension bonus will not accrue. These circumstances include the pensioner taking certain types of paid or unpaid leave, where deprivation applies under the gifting rules, or periods in prison.
It is important to advise clients to lodge their registration for the PBS within 13 weeks of reaching age pension age. This provides a window of opportunity for prospective male PBS claimants who haven’t reached age pension age, and who are born before December 20, 1944, to register for the scheme before it closes on September 20, 2009. The same window of opportunity does not open for females due the progressive adjustment to the increase of the female age pension age and service pension age in line with that of males.
In addition to ensuring the registration for the PBS is made as soon as possible, it is also important to ensure that the claim is made within the time permitted. Claims must be made within 13 weeks of ceasing to meet the work test, otherwise the bonus may be reduced and, in some cases, may not be paid at all unless special circumstances can be established.
The work bonus scheme
The WBS, which is to commence for new applicants from 20 September 2009, contrasts with the complexities of the PBS. Rather than provide a lump sum after a particular qualifying period as with the PBS, the WBS provides a pensioner with the potential to receive an increased pension each fortnight while they continue to work after reaching age pension age, service pension age or if they qualify for the income support supplement.
This is achieved by adjusting the amount of ordinary income that is counted for income test purposes.
Where a person qualifies for the WBS, the amount of income that is assessed for income test purposes is adjusted so that an additional $250 ($500 x 50 per cent) each fortnight is excluded from the test. Where the period is less than 14 days, the amount excluded is calculated pro rata on a daily basis.
Apply now or start later?
Whether a person should register under the currently available PBS or wait until the commencement of the WBS from September 20, 2009, depends on a number of factors. These include how long the person intends to remain in the workforce once they reach pension age and how much they will earn during that time.
The PBS system does not restrict the amount a person earns during the deferral period. However, as the WBS is a fortnightly test once a person earns more than $500 from employment over and above the normal income test limits, the amount of additional pension earned will be affected.
It would appear that, as a general rule, if a person has the option of registering now for the PBS or waiting until the WBS commences, in the short term the WBS will provide the better benefit. However, where a person proposes to work for a longer period, say three to five years, the PBS may provide the greatest benefit due to the substantial increase in the multiplier used in the calculation.
Graeme Colley is national technical manager, ING Australia.
