Nick Bruining Q+A: How can I keep a $460,000 compensation payout and a full Centrelink age pension?

Question

I am in my 70s and about to receive a compensation payout of about $460,000 after developing cancer linked to my occupation.

My wife and I get the full pension, own our home, have two cars worth $20,000 and contents and personal items worth about $10,000 as far as Centrelink is concerned.

We no longer have any superannuation but have about $40,000 in bank accounts.

I plan to pre-pay our funerals with the money and I want to help my daughters pay out their mortgages.

Will the gifting rules apply to us?

Answer

Unfortunately, the source and reason you received these funds are not considered in the means-testing system.

Centrelink simply applies the relevant social security legislation, which says that if you have the means to either fully or partially fund your own retirement, you are compelled to do so through means testing.

Within 14 days of receiving the money, you will be required to notify Centrelink. At that point your total Centrelink-assessable assets will include all of the banked funds, or $500,000, plus the cars and contents at $30,000. All up, $530,000.

This puts you over the current homeowner asset test limit of $499,000 by $31,000. Do nothing and your combined fortnightly pension will drop by $93 a fortnight.

Pre-paying $15,500, or a combined $31,000, for your funerals will certainly bring you back to the $499,000 threshold for a full pension.

With respect to assisting your daughters, the gifting rules — where you can reduce your financial assets by $10,000 a year with a maximum of $30,000 over a rolling five-year period — will still apply. But they will have no effect.

You will still need to advise Centrelink and the gift will stay active on your records for the next five years. This is in the event other assets are received and, collectively, they could tip you over the limit again, or if one of you passes and the lower single means-test limits will apply.

For this reason, it might be beneficial to ensure Centrelink records the gift as coming from you alone as the gift would disappear if you passed away before your wife.

You might also consider keeping some money in reserve for possible future expenses including aged care costs.

Question

Some time ago, you wrote about life insurance companies charging what amounts to a loyalty tax on existing clients who are forced to pay the higher premiums as they age.

That forced us to take a close look at the level of cover we have in place and realised that we can save more than $1000 a year by talking out life insurance cover using our superannuation.

Thanks for the information, but we now need to know how to go about changing our cover.

Answer

Superannuation funds use what are called “group insurance schemes”, where the entire pool of members of the fund is effectively insured through a single policy.

The significant discounts come about by the dramatic economies of scale, plus the fact that no commissions are being paid.

One important point, however. Compare the total and permanent disability claim definitions of the super fund’s policy to your existing policy if you need that cover. Sometimes, a TPD claim will only be accepted if the member cannot return to any form of employment, not their original occupation.

To effect the transfer, obtain a “certificate of currency” or other proof of cover from your existing insurer, which you can probably download from their website.

Next, write to the customer service team of your super fund requesting they transfer the cover, setting out the amount of cover you want to add and enclosing proof of the existing cover.

The super fund will forward the request to the insurer and they will respond in writing.

Wait until you have the written confirmation in hand, which will also explain how to accept the terms of the transfer offer. Once you have activated the transfer, cancel the old policy.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association