Top Social Security Strategies you didn't know about

Maximising social security benefits, such as the age pension, has been a major goal for many Australians once they reach retirement. The catch is many won’t qualify for the full (or even a part) pension due to their level of income or assets.

Jennifer Brookhouse* outlines some strategies that can be used to reduce your assessable income and/or assets and increase your Centrelink benefits.

Strategies for the income test

1. Purchase an income stream

A good way to reduce your assessable income for social security purposes is to purchase an income stream. A key advantage is any capital received as part of the income payments (the ‘deduction amount’) is not counted towards the income test. Conversely, financial investments such as shares and term deposits are deemed to earn a specific rate of interest, regardless of the amount actually earned. This difference can have a significant impact on the income support payments. 

To benefit from this strategy, you could use superannuation money to start an account based pension where you may also qualify for some potential tax concessions. If you don’t have super money (or are ineligible to make super contributions) you may want to purchase an annuity with a term of six years or more, or a term equivalent to their life expectancy.

2. Switch dividends or trust distributions for salary

Under the Work Bonus scheme, the first $250 per fortnight of employment income is not counted towards an eligible pensioner’s assessable income. Where employment income is less than $250 per fortnight, the difference is accrued in an ‘income bank’ (up to a maximum of $6,500) which can be used to offset future employment income.

The Work Bonus normally isn’t available to those who are self-employed, as it can only be used to offset income earned by employees in an employer/employee relationship. However, those employed by their own business, run through a private company (or family discretionary trust), could qualify for the Work Bonus if they arrange to pay themselves a salary rather than receive dividends (or trust distributions).

Strategies for the asset and income test

1.  Gift assets

Those eligible can gift amounts of up to $10,000 each financial year, up to a maximum of $30,000
over a rolling five-year period, without the value being assessed under the gifting (deprivation) rules. Examples of assets commonly gifted are financial investments and personal assets. However, it’s also possible to gift interests in an entity, such as a private family trust or company, or the family home. Given the gifting thresholds are quite low, it may be worthwhile gifting assets of significant value at least five years before reaching age pension age. For those just marginally over asset test limits, it may be a good way to reduce assessable assets over time.

It’s important to bear in mind that if you make  a gift you are giving up their own access to this capital or income. So, it’s important to ensure there’s sufficient liquidity or capital for your own needs before making a gift.

2. Hold money in the super accumulation phase

For those under age pension age, superannuation benefits held in the accumulation phase are exempt from both income and assets tests. For this reason, some people may want to add otherwise assessable funds to superannuation by making salary sacrifice or personal super contributions. If a member of a couple is under age pension age, consideration could be given to investing in the younger person’s name.

All superannuation contributions are preserved so you need to ensure you have access to sufficient income or capital while superannuation is not accessible.

3.  Establish a Special Disability Trust

Parents and immediate family members can place up to $500,000 in a Special Disability Trust for the future care and accommodation of a person who meets the definition of ‘severely disabled’ for social security purposes and not be affected by the social security gifting rules.

Within the guidelines, assets will be exempt from the assets test and income from the trust will be exempt from means testing, as it can only be used for the primary beneficiary (ie the disabled child). Strict eligibility criteria apply. For example, to benefit from these social security concessions, the donor must meet the definition of an eligible family member and be of age pension or veterans’ pension age.

Again, the person gifting assets must ensure they have sufficient income and capital for their own needs prior to making the gift.

4.  Plan for burial and/or funeral costs

Planning for burial and funeral costs may be a good strategy if you are marginally over asset test limits. The added benefit is that upon death, their families don’t need to worry about funding funeral expenses.

There are three key ways you can plan and pay for certain aspects of their funeral. These include:

• Purchasing a burial plot, which will be exempt regardless of its value.
• Pre-paying funeral expenses to a funeral director or investing in a funeral bond assigned to a funeral director. With both these options, the full value will be exempt provided there is a contract that sets out the services to be undertaken and no additional expenses need to be paid.
• Investing in a funeral bond not assigned to a funeral director. The value of these bonds will not be assessed provided the client has not also prepaid funeral expenses and the amount invested does not exceed the Funeral Bond Allowable Limit, which is currently $11,500¹ or less per person (or $11,500¹ for jointly owned bonds).

A client is not able to hold a funeral bond in additional to other funeral expenses.

5.  Establish a testamentary trust

A couple could plan to maximise the surviving spouse’s age pension by:

• altering their Will to ensure assets are left to a testamentary trust, which is a type of trust created via a Will and only comes into effect on death, and
• ensuring the surviving spouse is not a beneficiary (or potential beneficiary) of the testamentary trust, which means other people such as children or other family members will need to be appointed as trustees of the trust.

By taking these steps, the assets in the trust and the income they generate will not be assessed for social security purposes against the surviving spouse. The surviving spouse also does not benefit from the estate as they are not a beneficiary.

6.  Retain the family home

One of the lesser used social security strategies is retaining your principal place of residence, which is assets test exempt regardless of its value, provided the surrounding land is not more than two hectares. There are also special rural land concessions.

If you are over the assets test limit with a home needing renovations, or you are considering moving to newer and better accommodation, you could consider doing this before you claim your Centrelink entitlement, or as soon as is practical thereafter.

You should consider if the renovations undertaken would result in the property being overcapitalised before commencing any renovations.

All of these strategies have advantages and disadvantages. You should consider all aspects of the strategy not simply the social security outcome.

*Jennifer Brookhouse is a Senior Technical Consultant

1 Current as at 1 July 2012 and may be indexed in future years