Michael and Carol came to DKM to see if they would be eligible for a Centrelink Age Pension.

Michael is age 65 and about to retire and looking to claim an age pension. His wife Carol is age 58 and not working, but does not yet qualify for an age pension. Michael has $800,000 in super, all taxable component. Carol has $90,000 in super, all taxable component. They own their home and jointly hold a bank account of $40,000, $100,000 in shares and an investment property worth $275,000.

In their current situation Michael is not eligible for an age pension. The couple’s assessable assets amount to $1,215,000, which exceeds the assets test cut-off threshold of $1,126,500. With the income received from their other investments and an annual account based pension payment of $35,000 per year, the couple can receive an after-tax income of almost $51,000.

We discussed with Michael the benefits of a recontribution strategy, a recontribution strategy involves withdrawing a lump sum from Michael’s superannuation account and recontributing it into Carol’s superannuation. As Carol is not eligible to receive an age pension her superannuation is not included as an assessable asset.

If Michael cashes out $540,000 of his super and uses it to make a recontribution into Carol’s account, the couple’s assessable assets reduce to $675,000. This is well within the assets test cut-off threshold. As a result Michael is eligible for a partial age pension of $8,796, he can then reduce his pension payment to $26,204 and the couple’s after-tax income remains the same.

Below is an example of the benefits of a recontribution strategy:

Without Recontribution With Recontribution
Michael – Retirement Savings $800,000 $260,000
Carol – Retirement Savings $90,000 $630,000
Bank account $40,000 $40,000
Shares $100,000 $100,000
Investment property $275,000 $275,000
Total Assets $1,305,000 $1,305,000
Centrelink Assessable Assets $1,215,000 $675,000
Centrelink Assessable Income
Rental Income $13,750 $13,750
Deemed Income $3,739 $3,739
Assessable Income Stream NIL $12,181
Total Centrelink Assessable Income $17,489 $29,670
Centrelink Pension Payable
Age Pension – Assets Test NIL $8,796
Age Pension – Income Test $13,940 $10,894
Michael – Age Pension Payable NIL $8,796
Income Received
Bank Interest $1,000 $1,000
Share Dividends (inc Franking Credit) $6,500 $6,500
Rental Income $8,250 $8,250
Michael – Centrelink Aged Pension NIL $8,796
Michael – Retirement Savings Pension $35,000 $26,204
Total Income Received $50,750 $50,750

Without a recontribution strategy, adult non-financially dependent children could pay tax of $146,850 on the total of Michael and Carol’s lump sum super death benefits. After using the spouse recontribution strategy above, this tax could be reduced to $57,750.

Lump sum death benefit to adult children Without Recontribution With Recontribution
Tax-Free component $0 $540,000
Taxable component $890,000 $350,000
Tax on death benefit $146,850 $57,750
Increase in Net Death Benefit   $89,100

Please be aware there are limits on how much you can contribute into superannuation and contributions from previous financial years may affect how much you are eligible to contribute. Any amount contributed in excess of these limits is taxed at the highest marginal tax rate.

Assumptions: income from: bank account – 2.5% pa, shares – 5% pa (70% franked), property – 5% pa. Deeming rates on financial assets – 2% up to $77,400, then 3.5%. Couple age pension rate $1,246 per fortnight (combined and including pension supplement). Couple income test thresholds – $276 per fortnight to $2,713 per fortnight Couple assets test thresholds – $279,000 to $1,126,500. 2013–14 personal income tax rates.