Does claiming UK state benefits affect your Centrelink age pension? You’d be surprised!

A common excuse for not pursuing UK pension benefits is the fear that it will interfere with Centrelink payments and result in a similar or worse outcome for those claiming an Australian age pension.

These fears are unfounded. In fact, claiming UK benefits or any overseas pension will leave many Aussies substantially better off.

Provided you have been in Australia for more than 10 years, the UK pension income is assessed in a similar way to any other Centrelink-assessable income.

The gross amount received counts towards your income-free area under the income means test. For a single, the income-free area is currently $204 a fortnight. For couples, it’s a combined $360 a fortnight.

Once you exceed these thresholds, the Australian pension is reduced by 50¢ per $1 until it cuts out altogether. For singles, this cut-off limit is $2436.60 a fortnight. For couples, it’s a combined $3725.60.

The bottom line is that even if your pension is reduced, you are still 50¢ per $1 better off.

It is a Centrelink requirement that you pursue any foreign pension entitlements when you claim an Australian age pension, and that includes the UK state pension.

You can choose the frequency of the payment to be made, either four weekly or every 13 weeks. You can nominate an Australian or a UK bank account, but either way it is still assessable in Australia.

Irrespective of the amount and currency credited to your account, Centrelink will convert the amount to Australian dollars to determine the income test effects. It will use the retail exchange rate set by the Commonwealth Bank on the 15th of each month as the basis for the conversion.

Significantly, any amounts sent back to the UK to boost your entitlements under their system are not counted under the asset test.

Normally, deprivation or gifting rules might apply when you dispose of assets. The normal limit is $10,000 a year with a maximum of $30,000 over a rolling five-year period and amounts above these limits continue to be counted under the asset test and deeming system for five years from the date of deprivation. None of this applies if you make payments to boost your UK pension.

While the UK pension is taxable in Australia, it is also subject to a special tax ruling which provides an 8 per cent tax deduction based on the gross amount you receive from the UK.

An eligible couple that fully exploits the UK National Insurance system, but has no other financial assets, would enjoy an annual income of more than $70,000 a year. That includes about $44,000 a year courtesy of the UK state pension and $26,000 a year from an income-tested Australian age pension.

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