Centrelink rule to get Age Pension boost in growing retirement trend

A growing number of older Australians are exploring lifetime annuities as a way to secure a more predictable income throughout retirement. Alongside providing regular payments, this retirement strategy may also help some retirees qualify for a higher Age Pension payment under Centrelink’s means-testing rules.

For retirees with substantial superannuation savings and other assets, understanding how annuities are assessed could make a meaningful difference to their retirement income. In some cases, people with around $1 million in assets may be able to receive a part Age Pension after purchasing an eligible lifetime annuity.

An annuity involves paying a lump sum to a provider in exchange for a regular income for a specified period or, in the case of a lifetime annuity, for the remainder of the person’s life. Depending on the product and the individual’s financial circumstances, this arrangement can provide greater certainty about income while changing how some assets are assessed for government support.

Melbourne financial adviser Billy Norman told Yahoo Finance that annuities have become an increasingly familiar option in retirement planning. They can be particularly relevant for people who have stopped working and need to make their superannuation and savings last throughout retirement.

How an annuity could increase Age Pension payments

Centrelink uses means testing to determine whether a person qualifies for the Age Pension and how much they can receive. The assessment generally includes both an assets test and an income test.

The assets test considers the value of assessable assets, while the income test looks at income from relevant sources. Centrelink generally applies whichever test produces the lower pension entitlement.

For many retirees, the assets test is the deciding factor. People who own their homes may have significant savings or superannuation but still fall outside the limits for receiving a pension or qualify for only a reduced payment.

According to the figures cited in the original report, the assets threshold for a part Age Pension was $745,750 for a single homeowner and $1,121,000 for a homeowner couple. These figures can change with indexation and depend on individual circumstances, so retirees should check the current limits before making financial decisions.

Purchasing an eligible annuity may alter the amount of wealth Centrelink counts under the assets test. This is because qualifying lifetime income products can receive concessional treatment under Australia’s social security rules.

Norman explained that buying an annuity can reduce the value of a person’s assessable assets, potentially allowing them to qualify for a partial pension or receive a higher payment than they otherwise would.

However, the outcome is not automatic. The type of annuity, its terms, the purchaser’s age, other assets, income and personal circumstances can all affect the final assessment.

Understanding Centrelink’s 60 per cent rule

One important feature of certain qualifying lifetime annuities is the concessional assets-test treatment often described as the 60 per cent rule.

Under the arrangement outlined in the report, only 60 per cent of the relevant purchase price is counted as an asset for the applicable period. For example, if a retiree invests $100,000 in an eligible product, the amount counted under this rule could initially be $60,000 rather than the full $100,000.

The difference can matter for retirees who are close to the assets threshold for the Age Pension. A lower assessable asset value may improve their eligibility for government support.

The assessment can change as the annuity holder gets older. The report states that the assessable proportion falls to 30 per cent from age 85 under the relevant rules.

It is important to understand that this treatment does not apply automatically to every financial product marketed as an annuity. Eligibility depends on the product meeting the applicable requirements, and the precise treatment should be confirmed with Services Australia or a qualified financial adviser.

Retirees should also remember that Centrelink considers more than the assets test. Payments from an annuity may be relevant to the income test, meaning the overall effect on Age Pension entitlement depends on both sides of the assessment.

Why retirees are paying closer attention to annuities

Australia is experiencing a major demographic shift as a large number of people approach retirement. The Australian Bureau of Statistics has been cited as projecting that more than 2.5 million Australians will retire over the coming decade.

This growing retirement population is encouraging superannuation funds and financial service providers to develop more options for turning retirement savings into dependable income.

For many years, retirees commonly relied on superannuation withdrawals, bank deposits, investment portfolios and the Age Pension to fund their living costs. However, these approaches can leave people exposed to investment-market fluctuations, rising expenses and the possibility of outliving their savings.

Lifetime annuities offer a different approach. In return for an upfront payment, an eligible purchaser receives income according to the terms of the contract, potentially for the rest of their life.

This can help provide a more predictable financial foundation, particularly for retirees who are concerned about how long their savings will last.

Aaron Minney, head of retirement income research at annuity provider Challenger, told Yahoo Finance that lifetime annuities were far less common in Australia around 15 years ago. Their role has since expanded as the superannuation and financial planning industries have placed greater emphasis on retirement income solutions.

Challenger’s results reported in August showed domestic annuity sales rising by 17 per cent to $4.9 billion. Fixed-term annuity sales increased by 19 per cent, while lifetime annuity sales rose by 13 per cent.

These figures indicate growing interest in products designed to provide retirees with a structured stream of income rather than relying entirely on withdrawals from investment accounts.

How much of their wealth should retirees use?

Although an annuity can provide stability, committing too much money to one product may limit a retiree’s financial flexibility.

Norman said he typically would not allocate more than around 20 to 25 per cent of a client’s assets to an annuity. The remainder can stay in other investments or savings that may be easier to access when unexpected costs arise.

The appropriate allocation will vary from person to person. Someone with substantial savings, a paid-off home and few major financial commitments may have different needs from a retiree who expects significant medical expenses, wants to help family members financially or may need to move into aged care.

Before purchasing an annuity, retirees should consider their regular living costs, emergency savings, debts, expected health expenses and plans for the years ahead.

They should also understand the contract’s payment structure, any fees, available withdrawal options and whether payments are fixed or can change over time. Inflation is another important consideration because a regular income that seems adequate today may have less purchasing power in the future.

An annuity should therefore be assessed as part of a broader retirement plan, rather than selected solely because it might increase an Age Pension payment.

Why financial advice can make a difference

Many retirees are unfamiliar with the way annuities work or find the products difficult to compare. Financial advisers can help explain the differences between available options and assess how a proposed purchase may affect Centrelink benefits.

Norman said that, in his experience, many people purchase annuities through a financial adviser rather than arranging them independently.

Professional guidance can be particularly useful because the relationship between annuity income, assessable assets and government payments is not always straightforward. Two people investing the same amount could receive different outcomes because their ages, existing wealth, income and product terms differ.

Before proceeding, retirees should request a clear explanation of the expected income, total costs, Centrelink treatment and consequences if their circumstances change.

They should also compare the annuity with alternatives, such as keeping money in accessible savings or using a diversified investment portfolio to fund regular withdrawals.

The aim should be to find a sustainable balance between reliable income, access to money and eligibility for government support.

The inheritance question: What happens if the retiree dies early?

One of the main concerns surrounding lifetime annuities is whether money will remain available for family members after the purchaser dies.

When someone pays a substantial lump sum for a lifetime income product, the outcome for their estate depends on the contract’s terms. Some arrangements include guarantees or death-benefit provisions, while others may provide little or no remaining value after the purchaser dies.

This issue is sometimes described in the financial industry as the risk of dying soon after purchasing an annuity. Retirees may worry that they will have paid a large amount into a product without receiving payments for very long, leaving less money for their children or other beneficiaries.

Providers have responded by offering different product structures, including options designed to provide payments to an estate or beneficiaries under specified circumstances.

Minney said that greater flexibility and improved understanding of these products have helped address some of the concerns people have about lifetime income arrangements.

However, the protection offered depends on the particular contract. A product with a guaranteed payment period or death-benefit feature may have different pricing or income terms from one without those features.

Retirees should not assume that the original purchase price will automatically be returned to their family. They should check exactly what happens if they die shortly after buying the annuity and what, if anything, their beneficiaries would receive after many years of payments.

Balancing retirement income with family priorities

For people who want to leave as much wealth as possible to their children, an annuity may not always be the preferred choice. Keeping assets in investments or savings can provide more control over how wealth is passed on, although those assets may fluctuate in value and remain subject to the relevant Centrelink assessment rules.

For others, having dependable income throughout retirement may be more important than preserving the entire original investment for inheritance.

Norman explained that concerns about leaving money to beneficiaries are often a major reason people hesitate to purchase an annuity. The decision becomes easier for some retirees once they understand the available options and the consequences of each contract.

There is no single answer that suits every household. A retiree should consider whether their priority is guaranteed income, access to savings, pension eligibility, estate planning or a combination of these objectives.

In some cases, a partial allocation to an annuity may help provide regular income while leaving most of the person’s wealth accessible for emergencies and family needs.

What retirees should check before buying an annuity

Anyone considering this strategy should review several important points before committing their savings.

1. Confirm the current Centrelink rules. Check the latest Age Pension assets and income thresholds, along with the assessment rules that apply to the proposed product.

2. Verify that the annuity qualifies. Not every income product receives the same concessional treatment. Ask the provider or adviser to confirm the product’s eligibility and explain how it will be assessed.

3. Calculate the overall pension impact. A lower assessable asset value may help, but the annuity income could also affect the income test. Consider both calculations rather than focusing on the assets test alone.

4. Keep enough accessible savings. Avoid committing money that may be needed for emergencies, housing changes, health expenses or support for family members.

5. Review inheritance provisions. Find out whether the contract includes a guaranteed payment period, death benefit or payment to the estate, and understand when those benefits may end.

6. Compare alternatives. Consider other ways of generating retirement income before deciding that an annuity is the right option.

7. Seek appropriate advice. A qualified financial adviser can help assess the product alongside superannuation, savings, investment income and Age Pension eligibility.

Conclusion

Lifetime annuities are becoming a more prominent part of retirement planning in Australia as older people look for reliable income and ways to manage their savings over the long term.

Under certain Centrelink rules, an eligible lifetime annuity may receive concessional treatment under the assets test. This could help some retirees qualify for a part Age Pension or improve their payment, depending on their overall financial circumstances.

However, the strategy is not a guaranteed way to increase benefits. The product’s eligibility, income-test treatment, access restrictions and inheritance provisions all need careful consideration.

Retirees should check the current rules with Services Australia and seek suitable financial advice before investing a substantial amount of their savings. The best retirement strategy is one that provides sustainable income while preserving enough flexibility to meet future needs.

Frequently Asked Questions

1. Can buying an annuity increase the Age Pension?

It may help some retirees qualify for a part pension or receive a higher payment if an eligible annuity reduces their assessable assets. The final result depends on both the assets and income tests.

2. What is the 60 per cent rule for Centrelink?

For certain qualifying lifetime annuities, 60 per cent of the relevant purchase price may be counted as an asset under the applicable rules. The treatment changes with age, and eligibility should be confirmed before purchasing a product.

3. Will my family receive the annuity money if I die?

That depends on the contract. Some annuities include guaranteed payments or death-benefit provisions, while others may have no remaining payout value after the purchaser dies. Always check the terms before investing.