Increase your Centrelink Age Pension Payment - 1 July Rule Change

Are you, or is someone close to you, receiving a part age pension or fall just short of receiving the age pension payment due to a high level of assets? A change in the Centrelink means testing rules from 1 July 2019 provides an opportunity to potentially increase your age pension entitlement or free up access to the age pension if you currently fall just short of the cut-off.

In some cases we have freed up thousands of dollars annually in age pension entitlements for clients.

 What is the rule change?

From 1 July 2019 any new purchase of a lifetime annuity receives an instant 40% discount in assets test assessment and 40% discount on assessable income (provided the annuity product meets certain requirements). For example, if you purchase a $100,000 lifetime annuity that pays an income of $5,000 per annum, only $60,000 is assessable under the assets test and $3,000 p.a. is assessable under the income test.

Under the assets test, each $1,000 reduction in assessable assets frees up $3 per fortnight in age pension. Therefore, the above example could provide an additional $3,120 p.a. ($120 p.f.) in age pension entitlement.

What is a lifetime annuity?

A lifetime annuity is essentially a lump sum contribution of funds to an annuity provider in exchange for fixed income payments, usually paid monthly, for the rest of your life (if a couple, the annuity will pay out till the end of both your lives). The income payments can also be set up to increase each year in line with inflation (indexed).

Although the strategy works best if you do not access the funds contributed to the annuity, if extreme circumstances arise, you can still access a portion of the funds originally contributed. The level of the funds you can access over time reduces each year eventually to Nil.

An additional benefit of the particular lifetime annuity that provides the favourable Centrelink means testing, is the 100% refund of capital to your estate if you pass away within the first half of your life expectancy. When you set up the annuity, the life expectancy of the policy holder is taken into account. Your life expectancy is used to determine your level of regular income payments, in conjunction with interest rates, at the time of establishment. Additionally if you, or both members of a couple, pass away in the first half of the policy holders life expectancy, 100% of the initial capital invested is returned to the estate. After the first half of life expectancy, the capital value reduces each year to eventually nil.

There are generally no upfront or ongoing fees charged by the annuity provider. Any risks and costs taken on by the annuity provider is built into their agreed rate of repayments.

How could a lifetime annuity fit into your retirement plan?

We generally would not advise you contribute the entirety of your retirement savings into a lifetime annuity. Given the unknown nature of future expenditure requirements, and the benefits of not accessing the capital contributed to your annuity, consideration needs to be given to the appropriate amount to invest in an annuity and how much money to leave in reserve to give peace of mind for future access.

In summary, the guaranteed rate of repayments and the potential access to increased Centrelink Age pension benefits provide a strong case for the use of a lifetime annuity to many part age pension recipients or those on the margins of the asset test threshold. Careful consideration does need to be given however, as to whether a lifetime annuity is appropriate given your circumstances and financial objectives. If you would like to discuss whether this strategy is suitable and could be of benefit to you, please contact our office to speak with an adviser.

If you have any questions regarding the above, please contact John Mujic at Alternatively contact your Principal Adviser.

The example in this article is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. If you decide to purchase or vary a financial product, your financial adviser, Hillross Financial Services Limited and other companies within the AMP Group may receive fees and other benefits. The fees will be a dollar amount and/or a percentage of either the premium you pay or the value of your investments. Please contact us if you want more information. Prosperity Wealth Advisers Pty Ltd (ABN 32 141 396 376), Authorised Representative and Credit Representative of Hillross Financial Services Ltd, Australian Financial Services Licensee and Australian Credit Licensee 232 706.

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