Once Australians reach age 67, they might be eligible to receive the Age Pension to help fund living costs in their retirement.
The Age Pension is a fortnightly payment, paid by Centrelink, up to a maximum of $1,200.90 per fortnight for singles and $1,810.40 for couples combined.
These figures include the maximum basic rate, the maximum pension supplement, and the energy supplement.
But not everyone is eligible. Eligibility for the Age Pension is heavily dependent on your income level and the assets you own.
The problem is that many Australians miss out on payments because they understand the income test, but don't really understand how the asset test works.
Overlooking your asset limits could quickly reduce your Age Pension payment, or worse, push it down to zero.
Here are the eight most important things Australians at age 58 need to know about the Age Pension asset test before they retire.
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1. Limits and rules vary depending on if you're single or a couple
In order to receive the full Age Pension, single homeowners cannot own assets valued at $333,000 or more. Meanwhile, a couple (combined) can own up to $499,000 in value if they own a property.
2. Limits and rules are higher for non-homeowners
In order to receive the full Age Pension, single non-homeowners have a higher asset threshold of up to $600,000, and a couple (combined) can own up to $766,000 in asset value if they don't own a property.
3. Your assets include everything, except the home you live in
The asset test includes everything you own, whether it's in full, in part, or you have an interest in. This includes any stocks, like S&P/ASX 200 Index (ASX: XJO) shares, property, superannuation, an SMSF, or possessions you own. It also includes assets held outside Australia and any debts owed to you. It generally excludes the home you live in.
4. Deeming rules apply
In order to determine how much income you make from your assets, Centrelink uses a deeming rule. Deeming assumes your financial assets earn a fixed, set rate of income, regardless of what they actually earn. This assumed income is then added to your other income to determine your Age Pension rate. For single Australians, the first $66,800 of their financial assets has a deemed rate of 1.25%. Everything over that is deemed to earn 3.25% interest. Couples will have a 1.25% deeming rate on their first $110,600 of combined financial assets (this includes superannuation). Anything over $110,600 is deemed to earn 3.25%.
5. You can go over the limits and get a part-payment
If your assets are over the limit, it's still possible to receive a part Age Pension payment. The cut-off point for a part-payment for single homeowners is $733,500, and $1,000,500 if you're a single non-homeowner. Couples are also entitled to a part-payment, so long as their combined assets don't exceed $1,102,500 for homeowners. Non-homeowners can own assets totalling up to a limit of $1,369,500. If your assets come in above the initial limits but below these thresholds, you're still entitled to some level of payment.
6. You're subject to the "lower rule of two"
Centrelink assesses you under both an income and an asset test. It then applies whichever gives you the lowest rate of payment for your individual circumstances, which it calls a "lowest rule of two".
7. Gifting money is a no-no
It can be tempting to gift a portion of your assets if you're approaching the Age Pension age and think you'll be over the thresholds. But Centrelink has rules to prevent this too. Individuals can give away up to $30,000 over a five-year period before it will affect their assets test. Any amount over $30,000 will be counted, for five years, as an asset and included in the asset test. The good news is, at age 58, Australians can gift any amount of money without immediate penalties from Services Australia, as long as they are at least five years away from Age Pension age (age 67).
8. Downsizing could easily push you over
Similarly, it can be tempting to downsize your home to free up some cash, but this can be a bad idea too. The property you reside in is not included as part of the Age Pension asset test. But if you decide to downsize to something smaller and either invest or bank the rest, it could push you over the asset thresholds. For example, if you sell your $1 million primary residence, for example, and downsize to a $500,000 property, that $500,000 difference then becomes an assessable asset under Age Pension rules.
