Nick Bruining: It’s generous to be sure, but navigating Centrelink’s pension system is a real head-scratcher

While Australia can proudly boast about a top-10 position among the world’s best retirement income systems, it can also easily claim the title as the most complicated.

None more so than the Centrelink income means test used for pensioners. It’s the test that keeps the Canberra bureaucrats busy and financial planners — like yours truly — fully employed.

At the start, it is worth dispelling a few misconceptions.

Income counted under the test is vastly different to the way the Australian Tax Office assess income, and it has nothing to do with cash-flow.

For example. Not one cent of any money you pull out of super or take as a regular account-based pension payment is counted by Centrelink.

For employment income, Centrelink ignores the first $300 a fortnight through a system called “the working bonus credit system”.

When you cease working, you get an immediate $4000 credit to your working bonus “account”. It means that after you are granted a pension, you can receive $4000 from employment income before it starts to be counted under the income test.

If you don’t use that credit — or any subsequent $300 fortnightly credits — it builds up. So, four weeks after you were granted the pension, your working credit bonus account would already be up to $4600.

In fact, it can build up to a maximum of $11,800. In theory, you could land a contract job cleaning dongas for $5000 a week for two weeks at one of Gina’s mine sites and not lose any pension. You would still have $1800 in your account which will start to build all the way back up to $11,800 at $300 a fortnight.

To your assessable employment income, Centrelink will add foreign pensions and pensions you receive as a special superannuation fund pension. These are reasonably uncommon these days and are typically paid to ex-Commonwealth public servants.

Net rental receipts from investment properties are included, which means the gross rent, less any expenses. If you don’t have a rental profit and loss statement, Centrelink will use a simplified method of only counting two-thirds of the gross rent received.

For investment income, Centrelink completely ignore the actual income received from investments such as share dividends, bank interest, managed investment scheme distributions, super funds or payments from ABP funds.

Instead, the current value of each of these financial assets is added together, along with the value of any cash you have, bullion and then gifts over $10,000 a year, with a maximum of $30,000 over a rolling five-year period.

For couples, you are regarded as a single entity so who owns what is pretty much ignored with the exception of superannuation. If one member of a couple is under age pension age the money held in their super accumulation phase account is ignored.

This grand total of financial assets is caught under the “deeming system”, which is a notional rate of interest applied to your financial assets. For singles from July 1, the first $62,000 is deemed to be earning just 0.25 per cent a year. The total above this 2.25 per cent.

For couples, the lower rate of 0.25 per cent applies to the first $103,800 of combined financial assets and then 2.25 per cent.

The value these calculations produce is effectively Centrelink’s deemed annual income. They then divide the total by 26 to give a fortnightly amount.

If these deeming rates seem ridiculously low, you’re right. They were frozen during the COVID pandemic and as an election sweetener for next year, remain frozen until at least July 1, 2025.

This grand total of Centrelink-assessable income is then tested against your income-free area, which from July 1 will be $212 a fortnight for singles and a combined $372 a fortnight for couples. Once you exceed this number, your pension is reduced by 50¢ for each $1 over until it reaches the upper income test thresholds.

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