Receiving an inheritance during retirement can significantly impact your financial situation. However, it's essential to understand the complexities involved, especially concerning your Aged Pension. This blog will explore the initial impacts and broader considerations when receiving an inheritance on your Aged Pension in Australia.
Aged Pension Centrelink Assessment
Centrelink assesses your pension entitlements using two tests: the Asset Test and the Income Test.
Asset Test
The Asset Test evaluates your total assets, including:
Financial investments: shares, bank accounts, managed investments, and superannuation.
Home contents, personal effects, vehicles, and other personal assets.
Real estate.
Annuities, income streams, and superannuation pensions.
Gifting
Sole trader, partnerships, private trusts, and private companies (with specific rules around control and benefit).
Deceased estates providing benefit.
Assets not included in the test:
Your primary residence (up to 2 hectares).
Superannuation accounts for someone under Aged Pension age.
Granny flat interests (subject to special rules).
Centrelink totals your assessable assets and determines your pension:
If you have less than the Full Pension Limit, you receive a full pension.
If you have between the Full Pension Limit and the Part Pension Limit, you receive a calculated part pension.
If you have more than the Part Pension Limit, you receive no pension.
Income Test
The Income Test looks at your total income from two sources:
Actual Income: Employment income and rental income.
Deemed Income: Assets such as bank accounts, managed investments, shares, bonds, loans (including to family), and older income streams or defined benefits.
Deemed income is calculated at assumed rates:
The first $62,600 for singles and $103,800 for couples is assumed to earn 0.25%.
Anything over these amounts is assumed to earn 2.25%.
This means you could actually earn more on your investments than Centrelink assume you do, equally you could earn less.
Centrelink totals your assessable income and determines your pension:
If you have less than the free area, you receive a full pension.
If you have between the free area and the income test limit, you receive a calculated part pension.
If you have more than the income test limit, you receive no pension.
Assessment Outcome
Centrelink will pay you the lower of the two amounts calculated by the Income Test and the Asset Test.
Impact of Inheritance on Your Aged Pension
Receiving money from an estate will increase your assessable assets. The extent of this impact depends on your initial asset levels, the amount received, and the timing of the inheritance.
Timing
You only need to report the assets to Centrelink once you start benefiting from them, not when you are named in the will or when the person passes away. This follows the 14-day reporting rule, where changes must be reported within 14 days. It is crucial to coordinate with the executor of the estate on the timing of fund distribution to manage your Centrelink updates effectively.
Gifting Assets
This is the most understood rule around Centrelink, but you are actually able to gift whatever you like! You can give away $10,000 per year, up to a maximum of $30,000 over three years. Amounts above this are considered 'deprived assets' and are included in your Aged Pension assessment for five years.
Your Options
Often with inheritances in retirement, there is balancing interests between not ‘losing’ Aged Pension benefits, making the most of the money for the family, and also using it to enable your best life.
My advice here is to note that the Aged Pension is not an entitlement, but a support mechanism for generations who did not have compulsory superannuation. Our system was not build that your lifetime taxes fund your future Aged Pension, the benefits are funded by the tax payers in that given tax year.
Saying that, losing aged Pension is (usually) because you have additional assets to help you self fund your own retirement (usually) at a higher standard.
This can be a challenge if you have never invested, being made to invest later in life but with professional guidance and advice you should only benefit from this windfall.
I want to note, I say usually, because there are circumstances where receiving assets such as ‘life interests’ can substantially impact your Aged Pension benefits negatively, but not increase income to a sufficient level.
Key Steps if you are receiving an Inheritance
Balancing the benefits of an inheritance with the potential loss of Aged Pension benefits can be challenging. Here are some steps to assess the impact:
Confirm the Inheritance: Ensure you are actually receiving the inheritance.
Current Situation: Understand your current Aged Pension assessment and lifestyle funding - How does your situation work right now?
Inheritance Amount and Timing: Consider how much and when you will receive the inheritance. Are there broader impacts we can mitigate through timing?
Impact on Day 1: Assess changes to your Aged Pension and lifestyle upon receiving the inheritance. What would your situation look like if we did nothing?
Consider Options: Evaluate how to use the money to improve cash flow, cover expenses (especially those you may have been putting off like a new car, house repairs or a holiday) and meet broader needs and priorities. What are your options to make the most of this windfall?
Execute the Plan: Implement the chosen path and ensure Centrelink is informed.
In Closing
Receiving an inheritance in retirement can be stressful however ultimately, an inheritance should enhance your situation and benefit your family now and in the future.
Understanding the impacts and seeking professional advice can improve your outcomes.
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