Inheritance rules and the Age Pension explained

Will your windfall mean that you lose your pension?

Inheritance rules and the Age Pension explained

Receiving an inheritance should be a blessing, but at YourLifeChoices we are often inundated with queries as to what affect receiving a lump sum like this has on the pension.

Centrelink treats different lump sums in different ways, but the one thing that is important to remember for any lump sum that you receive is that you need to advise Centrelink of the payment 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.

Back to inheritances specifically, though.

Inheritances are exempt from the Centrelink income test. This is true for any lump sum payment you receive that is:

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

Just because the inheritance is exempt from the income test, it doesn’t mean that it won’t affect your pension payment.

What you do with the inheritance may still affect you under the income and/or assets test.

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 inheritance 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 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.

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

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

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

  • $10,000 in one financial year
  • $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
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.

Have you had an inheritance affect your Age Pension payments?

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    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.





    COMMENTS

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    Alan
    13th Nov 2020
    2:40pm
    If someone receives a significant inheritance then they should be willing to forgo receiving the Old Age Pension as they don't really need it and in my opinion would be greedy if they tried to minimise its value (by giving to to children etc) so that they can continue to receive the Pension.
    inextratime
    13th Nov 2020
    2:47pm
    Another reason there should be a universal pension. However it appears that the more complicated and bureaucratic the system becomes the more people can be employed to sort the whole mess out, reducing the unemployment figures accordingly. False savings !
    ozrog
    13th Nov 2020
    4:24pm
    Totally agree.
    johnp
    13th Nov 2020
    11:25pm
    Also totally agree; especially re a universal pension which in any case would actually save costs for the govt in the long run !!
    ozrog
    13th Nov 2020
    4:25pm
    Honesty is the best policy with Centrelink
    Mariner
    13th Nov 2020
    5:08pm
    Here we go again - now see it from a point where the recipient of a n inheritance lives in a modest flat and gets the pension. Now if he has sons and daughters would he not get a large house he does not need to preserve the money for his off-spring. No brainer really and as long as the home property is exempt from the asset that will prevail. Of course anybody would upgrade into a larger, more expensive dwelling and thus keeping the pension. Treat us all the same, home owners and renters and tax us accordingly. Calling age pensioners welfare people would cease and we all would become older Aussies. Do we really want to devide our society, along the line of indigenous and non-so? Aussies born here are indigenous where else do they belong? There are a lot of people with darker pigmentation coming from far away as well. Today we are together - let us not destroy that.
    McDaddy
    13th Nov 2020
    7:31pm
    You are right about the term Indigenous, it has been hijacked and even Pauline Hanson uses it. The term First Nations People is gaining more acceptance. People who are descendants of the First Nations People would not necessarily have dark skin. You would hope in your example that somebody would upscale the family home too much, leaving some money to enjoy life.
    rtrish
    13th Nov 2020
    5:21pm
    One of my siblings fought tooth and nail, in an effort to wring the most out of a very moderate family estate - more than actually was possible. I, as Executor, obviously worked hard, with legal advice, to keep things accurate. I was also aware (from being a pensioner myself), that over a certain amount, our pensions would be affected. That fact was not accepted by that sibling.


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