Inheritance and the Age Pension

Receiving an inheritance should be a blessing, but at YourLifeChoices we are often inundated with queries as to what effect 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 about any lump sum 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 of any subsequent changes in 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 such as artwork, a boat, caravan, motorhome or 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? Why not share your thoughts or experiences in the comments section below?

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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.

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