Lump sums and the Age Pension

Can my Age Pension be affected by a lump sum payment?
Different lump sums are treated in different ways by Centrelink. A lump sum is any one-off amount of money that you may receive for a variety of reasons. Some of these lump sum payments will be included in your income test for the Age Pensions and they may affect the amount of pension that you receive from Centrelink.

If you receive a lump sum for any reason, you need to advise Centrelink within 14 days of receiving the money. If you don’t do this, you risk being overpaid and then you will have to pay the money back to Centrelink.

Even if you think your lump sum will be exempt from the income test, you must still advise Centrelink of the payment and you will also need to inform them of any subsequent changes to your assets.

What counts in the income test
There are two types of lump sums – remunerative and non-remunerative. Centrelink treats each of these differently in the income test.

Remunerative lump sums
This encompasses all the money that you may receive for something that you have done. It includes:

  • commission payments
  • bonuses
  • director’s fees
  • leave payouts from your employer while you’re still employed
  • a loan you don’t need to pay back because you’ve received it as a payment for your services.

If the money you receive is a regular sum, Centrelink assesses it on the same timeline. For example, a monthly commission counts in your income test for the next month.

If it is not a regular sum, Centrelink will look at how long it took you to earn it. For example, if it’s a commission at the end of a six-week job, Centrelink will spread the amount over six weeks. In situations where it is unable to use either of those methods, Centrelink will spread the amount over 52 weeks.

Non-remunerative lump sums
These include a:

  • distribution from a family trust
  • royalty payment
  • grant or scholarship
  • series of payments for a lottery win; for example, if you win $10,000 a year for life
  • dividend from a private company
  • distribution from a private trust.

Centrelink spreads non-remunerative lump sum payments over 52 weeks when it assesses these under the income test.

What doesn’t count in the income test
Lump sums may be exempt from the income test if they’re:

  • unlikely to happen again
  • hard to predict
  • not for a service
  • not profits.

That includes:

  • a one-off gift
  • a one-off amount of superannuation
  • an inheritance
  • a payout for damages to property or personal effects
  • flood, bushfire and drought assistance
  • some redress payments, such as for negligence
  • one-off payments for a prize, reward or lottery win
  • a gambling win unless this happens often, or you gamble for a living
  • compensation from an Australian trust.

When lump sums may still affect your pension payment
What you do with lump sums may affect you under the income and/or assets test. It doesn’t matter if the lump sum is exempt.

If you spend the money on an exempt asset it won’t affect you under the assets test. This includes renovations or improvements to your principal home, mortgage repayments, or medical equipment.

If you buy a non-financial asset it will count in the assets test. This includes things like art work, a boat, a caravan, a motorhome or a holiday home.

Buying of adding to financial assets
If you use your lump sum payment to buy or add to your financial assets, Centrelink will use deeming rules to work out income from your financial assets. The deemed income counts in the income test. The assets may also count in the assets test.

Deeming rules lump sums will count in the income test if you’re:

  • putting the money in the bank
  • lending it
  • using it to buy securities or investments
  • putting it in your super fund if you’re over Age Pension age.

Lump sums won’t affect your income or assets test if you put it in a super fund if:

  • you’re under Age Pension age, and
  • you haven’t started drawing on the fund.

Gifting lump sums
You can give away all or part of your lump sum. But anything over the gifting limit counts in the assets test and will have deeming rules applied under the income test through deeming. The limit is a total of:

  • $10,000 in one financial year, and
  • $30,000 in five financial years – this can’t include more than $10,000 in any year.

For example, if you gift $10,000 in one financial year, you have reached the limit for that year. If you gift $10,000 each financial year for three years within five financial years, you have reached the limit.

If you put the money into a trust, Centrelink may treat it as a gift. It depends on who has control of the trust.

Case study one
Susan is a 75-year-old widowed age pensioner who owns her own home. Susan’s uncle Geoff has recently passed away and Susan has been nominated as the sole beneficiary of his estate. The estate includes a $600,000 home, $300,000 in bank deposits and a $60,000 car.

Susan has asked the executor of Geoff’s estate to distribute the home and investments equally between her three children, while she will take possession of the car to replace her current vehicle.

While Susan has chosen to forgo her inheritance in favour of her children, there are still some important pension implications to consider.

Forgoing an inheritance will usually result in the application of the social security deprivation provisions.

So in Susan’s case, $890,000 (being $600,000 + $300,000 less the $10,000 gifting allowance) will be assessed as an asset and deemed for five years.

This will result in the cancellation of Susan’s Age Pension. However, Susan may still be entitled to claim the Commonwealth Seniors Health Card if her adjusted taxable income is below $50,000 per annum.

On the other hand, had Susan decided to accept all the assets, she would still have lost her Age Pension, but she would be in a position to make up lost income by selling or renting the home and investing the $300,000.

An alternative option could be to forgo only part of the estate. For example, Susan could forgo the $600,000 home and accept all or part of the $300,000 in bank deposits. While Susan would still lose her Age Pension because of the assets test, she would have adequate funds to cover any decrease in her income.

Also, had Susan discussed her wishes with Geoff prior to his death, she could have asked him to nominate her children as the main beneficiaries to his estate, thereby avoiding any future adverse social security implications.

Case study two
Gertrude receives the full Age Pension but has a bit of luck and wins a lottery amount, not a first division win, but a handy $20,000. The winnings are not counted as income, but what she does with this money may affect the amount of Age Pension she receives. If she places the money in the bank, it will be assessed as an increase in her assets and the money will have deeming rates applied under the income test.

On the other hand, if she uses the money to renovate her existing property, she will continue to receive the same amount of the Age Pension, once she has spent the money. 

Related articles:
Pension thresholds March 2019
When is your house judged an asset?
How to reapply for the Age Pension

Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a Centrelink Financial Information Services officer, financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.

Written by Ben

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