People nearing retirement often want to know how much they can earn before it affects their pension, and now there is a bit of good news on the horizon for SMSF members who receive the Age Pension.
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Statistics indicate fewer Australians pass the Age Pension income test than the asset test. According to the Centre of Excellence in Population Ageing Research (CEPAR), approximately two-thirds of Australians receiving part pensions have too much income to be eligible for the full pension.
The other one-third of part-pensioners have too much assessable wealth (assets).
However, from 1 July, the income-free areas applying for the 2024–25 financial year will be $212 for a single member and $372 for a couple. These have seen an increase from $204 and $360 respectively.
Pensioners who continue working have an additional $300 a fortnight added to their income-free area before the pension starts to get clipped. In the case of couples, each pensioner can access the extra $300 but you can’t share it with your partner.
Michael Hallinan, consultant for SuperCENTRAL, said the income-free area is the amount of income which can be received in respect of each fortnight without adversely affecting entitlement to the age pension under the Income Means Test.
“Any amount in excess of the free-income area will reduce the Age Pension by 50 cents per fortnight for each $1 above the income-free area,” he said.
To illustrate how this will work for SMSF members, Hallinan gave an example of John, whose only income-earning asset is his SMSF pension balance of $400,000 as at 1 July 2024.
“The SMSF pension is a financial asset so the deeming test will apply. Under the deeming test John will be assessed as receiving $298 per fortnight,” Hallinan said.
“The first $212 has no impact on his age pension. The balance above the income-free area is $86. His pension entitlement per fortnight will be reduced from $1,116.30 – maximum pension entitlement before reduction due to means tests – by $43.”
He added that whether John draws down $20,000 or $35,000 from his pension is irrelevant as entitlement to the age pension is based on the deemed income from the pension account and not the pension payment amount.
“The $400,000 pension balance will be treated as producing $156.50 on the first $62,600 at 0.25 per cent and $7,591.50 on the balance being $337,400 at 2.25 per cent,” Hallinan said.
“This total of $7748.00 is converted to a fortnightly rate which is $298 ($7748/26). The first $212 of the $298 is within the income-free area and so does not affect John’s age pension entitlement. However, the balance – being $86 – will reduce his age pension entitlement by $43 given the reduction rate of 50 cents in the dollar.”
Keeli Cambourne
June 24 2024
smsfadviser.com