Age Pension 101: terms worth knowing to cash in during retirement

Understand the Age Pension - and its quirky terms and language. Alex Brooks explains that even if you don't think you'll need the pension, around 63% of Australians aged over 65 relied on some kind of government payment in 2023.

By Alex Brooks

The Age Pension is available to Australians aged 67 and over who meet eligibility tests. 

The reality is that most of us can’t get our heads around the impenetrable language, terminology and eligibility criteria of this amazing government benefit known as the Age Pension.

But - like Medicare. MyGov and Australia’s aged care system - the Age Pension is worth taking time to understand. 

Even if you don’t think you’ll ever be eligible to receive a full Age Pension, you’ll find it valuable to know how it works. Depending on your income or assets, some people can be eligible for a part-Age Pension.

See the latest maximum Age Pension rates for eligible Australians.

Get more income after the age of 67 by understanding the Age Pension (and Peak Pension)

Most retirees in Australia fall into 3 different financial categories:

1. Fully self-funded retirees: relying on investments inside and outside of superannuation.
2. Mixed superannuation and part-pension retiree: relying on a mix of Age Pension and superannuation savings which can sometimes confusingly also be turned into ‘pensions’ or ‘account-based pensions’.
3. Full pensioners: relying solely on the full Age Pension or other government payments, such as a Veterans Affairs pension.

Learning how retirement income, annuities, and account-based pensions - called ‘income streams’ - and the Age Pension work together can help you redefine whatever financial journey you want to take as you get older. Read more about how retirement income works.

Understanding the Age Pension puts you in a financial literacy sweet spot. If you can make a Peak Pension work for your retirement income, then it’s even more valuable to understand.

Many Australians won’t qualify for the Age Pension early in their retirement, but as they get older and spend more of their assets, they may become eligible.

At the beginning of 2023, around 2.8 million people aged 65 and over received income support payments, equating to 63% of the population aged 65 and over. Of these, the vast majority (92% or 2.6 million) received Age Pension.

Source: AIHW

The Australian Government delivers social security payments and services through Centrelink. Centrelink is managed by Services Australia. You can apply for the Age Pension online or through an app using your MyGov account.

To receive any part or full Age Pension payments, there are 2 tests Centrelink applies to assess your means - the income test and the assets test.

After Centrelink applies both the assets and income tests, it determines your full or part Age Pension based on the test that calculates the lowest Age Pension amount.

Assets test for the Age Pension

The Age Pension assets tests limits determine how much of the Age Pension you will be paid.

Read more about asset types that affect your eligibility for the Age Pension.

The Department of Social Services reviews these assets test limits and cut off points in March, July and September each year, so they change often.

Many Australians may qualify for a part-Age Pension payment if they don’t qualify for the full pension.

Remember, you can own your own home as a ‘main residence’  - it can be worth literally millions of dollars - and it won’t impact your assets test.

Other important assets to consider as part of this test can include any shares in companies, trusts, investments or other things that are held outside of Australia - it’s important to get personalised financial advice tailored to your circumstances.

Understanding your personal asset test thresholds is crucial, as exceeding them triggers a taper rate, which you can read about further down in this story.

Income test for the Age Pension

The Age Pension income test is designed to encourage people receiving the Age Pension to supplement their payment with additional private income.   

The Australian Government wants older Australians to work, if they are able to, and wish to do so. Read more about the 5 industries that employ older Australians.

For people over the age of 67 - which is the age you can qualify to receive the Age Pension - the application of the pension income test needs to be clearly understood to:

1. qualify to receive a part or full Age Pension
2. understand how much you will receive each fortnight as payment.

Centrelink assesses your gross income (that is, your before-tax income) from all sources to determine your eligibility for the Age Pension. 

These sources include income from overseas, not just Australia. If you have a partner, their income will also be included in your income test assessment. 

If you have to live separately from your partner due to ill-health, then this income is assessed differently.

The Age Pension income test includes income you are deemed to receive from your financial investments.

Age Pension income can come from different sources:

1. Work - in the form of a salary or wage. If you receive this, you’ll want to understand the Work Bonus and income free areas.
2. Investments - in the form of interest payments from bank accounts, shares, bonds or managed investments. If you receive this, you’ll want to understand deeming and how it is applied to your income.

To assess your income, Centrelink combines all your sources of income - from work and investments - to provide a fortnightly estimate. This fortnightly payment estimate can change if your income changes.

Researchers from the Centre of Excellence in Population Ageing Research (CEPAR) say around two-thirds of Australians who can get a part-Age Pensions have too much income to be eligible for the full Age Pension. The other one third of part-Age Pensioners have too much assessable wealth (assets).

The taper rate: more Age Pension jargon

The taper rate comes into play for every dollar earned beyond the assets test thresholds.

With a deduction of $3 from the fortnightly age pension for each additional $1000 in assets, this rate needs to be carefully understood.

The 'taper' rate reduces the Age Pension payments for people with higher levels of assets.

The taper rate is usually associated with the assets test but there is also a tapering associated with the income test.

The rule of thumb for the income test taper rate, according to National Seniors, is that if your income exceeds $190 per fortnight, for every $1 of income you lose 50c of pension.

Deeming: how it works and why you must understand it 

Deeming assumes that financial investments like interest from bank accounts earn a certain rate of income, regardless of the amount of income they actually earn.

The bonus of deeming rules is that if Age Pension recipients earn more than these deeming rates, the extra income may not be assessed under the income test.

These deeming rules encourage people with higher sums of money to invest to earn more return from their money than standard bank accounts that pay low interest rates.

You can use this Industry Super online calculator to work out how deeming might affect your investments or income. 

Why your home is so important if you’re on a part or full Age Pension

Owning your own home is an important element of Australia’s retirement system and the Age Pension.

If you own a property you can live in - and more importantly, live in as an older person with more health needs - then you remove a large chunk of living costs and can therefore survive on a smaller monthly or annual income.

But if you don’t own a home, you can take comfort knowing around 31% of Australians rent, according to the Australian Bureau of Statistics.

Renters are treated differently for Age Pension purposes. Renters can hold more assets (because they need to spend more to live).

Rent assistance can be paid in addition to a part or full Age Pension to people who rent. The maximum amount of rent assistance you can claim as a single person is $157.20 per fortnight and for a couple, it is $ 148.00 per fortnight (combined).

Advantages of owning a home when receiving a part or full Age Pension

People who own their own home can take advantage of the government’s downsizer bonus to top-up their superannuation or retirement income.

There is also the Home Equity Access Scheme for eligible people who want to ‘borrow’ some of the equity in their home for extra retirement income.

Advantages of renting a home when receiving a part or full Age Pension

Renters can have more assets than home owners and may also be entitled to receive more rent assistance.

For retirees looking for a sea or tree change, renting can be the ideal way to try out a new location without going to the expense of buying and selling (and potentially regretting) what might happen next.

Some homeowners choose to rent out their home for income and rent somewhere cheaper - retirees looking for an additional income stream may decide to find tenants for their property and rent elsewhere as another way to create cash flow from their home, for example. This type of rent is likely to fall under income for the Age Pension income test.

Renting can provide retirees with the freedom to live in a location that best meets their needs (for example, being closer to family or being part of a retirement community).  

Applying or ‘claiming’ your full or part Age Pension

Like most Centrelink, parenting, veterans other government payments - the Age Pension is a complex beast full of almost-impossible-to-understand requirements that can demand extensive documentation and proof.

You can apply for the Age Pension around 13 weeks before you’re entitled to receive it.

You can apply online or with a paper form. To apply online, you will need a myGov account linked to your Centrelink account. 

If you need help, you can call the Services Australia retirement line on 13 23 00.

People can also ask to talk, free of charge, to Financial Information Services Officers about options with their savings, investments and related arrangements by calling 13 23 00. They can't give personalised financial advice.

It’s often helpful to have quality personalised financial advice from a licensed financial adviser to maximise your opportunities to qualify for government payments like the Age Pension.

You can also make the most of the free online information and calculators to help make decisions that are right for you.

Wait! There's a residency test to qualify for the Age Pension

You generally need to have been an Australian resident for at least 10 years, ensuring there is no break in your residence for at least 5 of these years.

People who have been residents in countries other than Australia may need to fill in a MOD O form to establish their residency status for Centrelink payments like the Age Pension.

Read more about residency rules and the rules for New Zealanders claiming payments in Australia. Australia has social security agreements with other countries, which means some people may qualify for an Age Pension paid by an overseas government.

Where to get help with the Age Pension

Centrelink has a complaints line that can be reached on 1800 132 468.

If you can’t easily resolve a problem, the Commonwealth Ombudsman may also be able to help.

Sometimes the Administrative Appeals Tribunal can resolve issues, too.

You may be able to get free legal advice from local community legal centres. 

_{Advice given in this article is general in nature and does not take into account your personal circumstances. It is not intended to influence readers' decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.}