How does the age pension work?

It’s no secret that Australia, like many countries around the world, has an ageing population. According to the Australian Bureau of Statistics (ABS), the proportion of the population aged 65 years old and up increased from 12.3% to 15.9% over the 20 years to 2019. But the Department of Social Services said this number is expected to grow to 25% by 2047. 

Meanwhile, a report from the Australian Institute of Health and Welfare found that 2.5 million people aged 65 and over received at least a partial pension in 2017, representing 66% of older people. 

So, it’s likely that upon retirement, you or someone you know will be eligible for the age pension. And there’s no shame in that. After all, you’ve probably paid hundreds of thousands in taxes over the years - so perhaps it’s time you got something back.

But before you hang up the work boots, it’s important to understand exactly what you’re entitled to so that you can plan and budget for your retirement accordingly. To help out, we’ve put together this brief guide to the age pension.

Let’s start with the basics:

• What is the age pension?
• Who can get the age pension?
• How much can you earn on the pension?
• How much assets can you have?
• How much is the age pension?
• Do age pension rates change?
• How to apply
• What to do if your situation changes

What is the age pension?

The age pension is a government income payment designed to support older Australians in their retirement. The scheme also encourages pensioners to maximise their overall incomes and is paid on a fortnightly basis. 

Who can get the age pension? 

This might seem like a straightforward question but it can actually get pretty complex. There are three tests set out to see whether an individual is eligible for the pension. You must: 

1. Be at least 66 years old
2. Be an Australian resident 
3. Meet an income and assets test

Easy right? Not quite.

The age test

The Australian Government recently began increasing the age at which you can start receiving the age pension. Use the table below to see if you’re affected and if you qualify.

Your birthdate	Your Age Pension age	Date of Age Pension age change
1 July 1952 to 31 December 1953	65 years and 6 months	1 July 2017
1 January 1954 to 30 June 1955	66 years	1 July 2019
1 July to 31 December 1956	66 years and 6 months	1 July 2021
On or after 1 January 1957	67 years	1 July 2023

Residency test

Not only must you be an Australian resident; you must be in Australia on the day your claim is lodged to qualify for the age pension. Additionally, you must satisfy one of the following requirements:

• Be an Australian resident for a total of at least 10 years, with one stay lasting for at least five years consecutively
• Be receiving Widow B Pension, Widow Allowance or Partner Allowance immediately before reaching pension age
• Be a woman whose partner died and has been a resident for two years prior to claiming

Former and current refugees are exempt from the ten-year rule. 

Pension means test

Applying for the age pension will require the Department of Human Services (DHS) to find out the scope of your wealth and how much money you’re eligible to receive. There are two tests used to find this out: the income test and the assets test.

It’s important to note that although both of these tests will be used, only one will be applied to your pension: the one that results in the lower pension rate. 

The pension income test

The DHS defines assessable income as the gross employment income you earn from work. Examples of this include: 

• Wages
• Income from financial investments
• Income from superannuation funds
• Dividends from a private trust or company
• Income from outside Australia, including non-Australian pensions

Some investments and assets will also be subject to deeming rates - a pretty complex topic. To drastically summarise, deeming is a set of rules that the DHS will use to estimate your income from your financial assets. It assumes these assets earn money, regardless of whether they actually do or not. Check out our article on deeming rates for a full explanation. 

Examples of assets subject to deeming rates include:

• Bank accounts
• Term deposits
• Managed investments, loans and debentures
• Listed shares and securities 

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How much can you earn on the pension?

There are different rules - depending on your relationship status - regarding how much you can earn and how that will affect your pension. 

Singles

If your income per fortnight is	your pension will rise by
up to $180	$0
over $180	50 cents for each dollar over $180

A couple living together or apart due to ill health 

If your income per fortnight is	your pension will rise by
up to $320	$0
over $320	50 cents for each dollar over $320

If you earn too much money for the fortnight, you’ll reach the ‘cut-off point’ and won’t receive a pension payment for that period. You’ll find those amounts in the table below. 

If you're	you won’t receive a pension payment when your income reaches
single	$2,115
a couple living together	$3,237.20 combined
a couple living apart due to ill health	$4,190 combined

All info in the tables above accurate as at 13 December 2021

How much in assets can you have on the pension?

In addition to defining your income, the DHS is required to find out the wealth of your assets to see if these will affect your payment rate. 

Examples of assets include:

• Real estate that’s not your residential home 
• Financial and superannuation investments
• Motor vehicles
• Jewellery 
• Life insurance policies 
• Cryptocurrencies 

Note: Assets that fall into these categories that are overseas will be converted into the equivalent Australian dollar amount. 

There are some notable exceptions to items you might have thought of as assets; these are referred to as exempt assets. Examples of this could include:

• Your residential home and surrounding land up to two hectares 
• Your residential home, if you vacate it for up to 12 months or two years if entering a care situation 
• Any property or money left to you in an estate, which you can’t get for up to 12 months
• A cemetery plot or prepaid funeral 
• Aids for people with disability 

If you enter an aged care facility, your residential home may be considered an exempt asset indefinitely on the provision that: 

• The income recipient entered a care situation between 1 July 2004 and 31 December 2016
• You have not re-entered aged care after being absent for more than 28 days
• The resident is accruing a liability to pay an accommodation charge, a daily accommodation payment, or daily accommodation contribution
• Their principal home is rented

Once the DHS has figured out how much your assets are worth, they’ll see if these exceed the asset test limit. These limits are updated every January, March, July and September annually. 

For every $1,000 of assets you have over these limits, your pension will be reduced by $3 every fortnight. 

If you're	Home owner	Non-homeowner
Single	$270,500	$487,000
A couple (combined)	$405,000	$621,500
A couple, separated due to illness (combined)	$405,000	$621,500
A couple, 1 partner eligible (combined)	$405,000	$621,500

Info accurate as at 13 December 2021

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How much is the age pension? 

Now that we’ve gotten through the super simple topic of who can get the age pension, it's time to look at how much you could actually receive. 

The maximum pension rates are broken down into three rates: basic rates, the pension supplement, and the energy supplement. The pension supplement is a regular extra payment designed to help with bills and medicine costs; as is the energy supplement for energy costs. 

Check out the rates in the table below: 

Age pension per fortnight	Single	Couple combined	Couple apart due to ill health
Maximum basic rate	$882.20	$1,330	882.20
Maximum pension supplement	$71.20	$107.40	71.20
Energy supplement	$14.10	$21.20	$14.10
Total	$967.50	$1,458.60	$967.50

Info accurate as at 13 December 2021

Do the rates change? 

Yes!

Base pensions are indexed twice a year - on 20 March and 20 September - to keep them in line with Australia’s cost of living. This is measured by growth in the Consumer Price Index (CPI) and the Pensioner and Beneficiary Living Cost Index - whichever is higher.

The wages benchmark sets the combined couple rate of pension at 41.76% of Male Total Average Weekly Earnings. The single rate of pension is two-thirds of the couple rate. 

Work bonus 

The Work Bonus provides an incentive for pensioners to work by allowing them to do so without significantly reducing the amount they receive in their pension. It does so by not assessing the first $300 of fortnightly income from work, in line with the pension income test free area, as of 1 July 2019.

So for example, a single pensioner could earn up to $174, plus the work bonus of $300 totaling $474, and still receive the maximum rate of pension. 

For those pensioners not working, don’t fear; you’re not missing out! If you’re not working and not using the work bonus, that $300 fortnightly exemption amount accrues in a work bonus income in the bank. 

From 1 July 2019, the maximum amount that can accrue is $7,800. This amount then offsets future income from work that would otherwise be assessable under the pension income test. Best of all, it never expires! 

*Note: Prior to 1 July 2019, the work bonus amount was $250 a fortnight and the maximum amount that could be accrued in the work bonus income bank was $6,500. 

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Case studies 

Here are two different real-life people - whose situations you might be able to relate to - in order to see how much of the age pension you could receive. We’ve heavily simplified these cases to give you a vague idea of how the pension works. 

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Pan Shon

Pan is a 79-year-old Australian who has been living in the same home he purchased 30 years ago. He’s lived the bachelor lifestyle since his youth and can play a round of golf in two hours. We can see Pan passes both the age and residency test.

Pan receives income from superannuation and has some money tucked away in savings accounts and term deposits. This means that fortnightly he earns $500. So, since he is earning above the pension income test's 'free area' for singles ($180), his pension will reduce by 50 cents for every dollar above this amount. This comes to $160 - to be taken from the maximum pension rate for a single of $967.50 - which would leave him to receive $807.50 per fortnight. 

But we're not done yet - we also need to apply the asset test to see if that would deduct more or less from the pension amount.

Pan’s assets include some savvy investments and a sleek new Porsche, totaling a value of $300,000. Since this exceeds the asset limit for a single homeowner ($270,500), we must subtract $3 from the pension for every $1,000 above that limit. 

This would be a reduction of $88.50 from the maximum pension rate for a single of $967.50, leaving him to receive $879 fortnightly. 

Since the DHS requires you to be paid at the lower rate of payment, Pan would be assessed under his income test and receive a part pension of $807.50 per fortnight. 

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Andy and Fran 

Andy and Fran (Frandy) are 70-year-old British immigrants. They’ve been together 50 years and live in an aged care facility. They moved to ‘Straya in 2002 and both received citizenship in 2006. Having lived here for the entirety of that period, they pass the residency test.  

Let’s apply the income test to Frandy as we did above with Pan. As the former Sheriff of Nottingham, Andy receives a tidy sum from England. Additionally, Fran has some savings from a real estate business; the pair’s total income comes in at $1,500 fortnightly. This is above the pension income test free area for a couple ($320), so their pension will reduce by 50 cents for every dollar above this amount. 

This comes to $590, which would be taken from the maximum pension rate for a couple of $1,458.60. Meaning, they would receive $868 per fortnight. But we also need to apply the asset test to see if that would deduct more or less from their pension payment. 

Due to Fran’s wheeling and dealing in the real estate business, the two have three lucrative investment properties; this totals their assets at $1.5 million. As this exceeds the asset limit for a homeowner couple combined - $405,000 - we must subtract $3 from the pension for every $1,000 above that limit. 

This would be a reduction of $3,285 from the maximum pension rate for a couple. As a result, Frandy would unfortunately not receive a pension payment. 

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How to apply for an aged pension?

Savings.com.au has outlined the steps below to help you through the aged pension application process:

1. Prepare to claim: Hopefully, you’ve already done this based on the information we’ve provided above. Double-check your eligibility and have your paperwork ready regarding anything the DHS might require information on. 
2. Get ready to claim: The easiest way to claim is online and to do this you need a myGov account linked to Centrelink. You can verify your identity with a birth or citizenship certificate and two other documents that confirm your identity in the community, like a drivers license or passport. If you can’t claim online you can call the DHS on the ‘Older Australians line’, go to a service centre or print and complete the ‘Claim for Age Pension and Pensions Bonus form’ and the ‘Income and Assets form’. 
3. Make your claim: Sign in to myGov and go to Centrelink. Select ‘Payments and Claims’ from the menu, then ‘Claims’, then ‘Make a claim’. Under ‘Seniors’, select ‘Get Started’. From here, you’ll be prompted to answer a number of questions and submit any necessary documents. 
4. Track your claim: After submitting you’ll get a receipt confirming your submission, the ID number of your claim, the estimated date your claim will be complete and a link to track its progress online. You’ll be notified of the result of your claim via a letter to your myGov inbox, Centrelink online account or your letterbox. 

What do I do if my situation changes?

Circumstances change; that’s just a part of life. But you must notify the DHS if: 

• Your address changes
• Your income changes
• Your assets change
• Your partner’s income or assets change
• You stop living with your partner
• Your partner dies
• You marry or start living with your partner

You’ve got 14 days to let the DHS know if there are any changes to the above mentioned information. If you don’t, they might pay you too much - which you’ll have to pay back. 

Can I still get the pension if I go overseas? 

Essentially - yes. However, the length of time you’re going for and where you’re going is a major factor in the answer to this question. 

You need to tell the DHS you’re leaving the country if you:

• Are going to live in another country
• Will be away for more than six weeks
• Get payments under a social security agreement with another country
• Came back to live in Australia within the last two years and started receiving the Age Pension since then

If you don’t fit into one of these situations, you needn’t tell the DHS of your travel plans.

When you leave Australia for less than six weeks, your Age Pension won’t normally change. Leaving for longer than this will see your Pension Supplement drop to the basic rate and your Energy Supplement stop completely. If you leave Australia for more than 26 weeks, your rate may decrease based on how long you’ve been a resident. If you’ve been a resident for more than 35 years, your rate won’t normally change; if you've lived Down Under for less than this period of time, you will see likely receive a lower rate. 

If you leave Australia to live in another country, your Pension Supplement will drop to the basic rate and your Energy Supplement will stop completely. You’ll also get an ‘outside Australia rate’ on your Age Pension. These are a separate set of thresholds and limits for Australian expats regarding how much they can receive on the age pension. 

Savings.com.au’s two cents

There’s a wealth of information in this article regarding the age pension - so much that it may seem overwhelming. But don't fear - applying is pretty straightforward provided you’ve got personal and financial information handy. 

It’s also important to note that understanding the pension doesn’t just apply to those of pension age; start planning for your retirement now, however old you are! 

The pension provides older Australians with a great safety net should they need it, but you can arguably retire more comfortably by staying on top of your super and staying in control of your finances before you reach retirement. 

In today’s low-interest environment, it’s more difficult to grow your money in a traditional savings account. You might like to consider investing in ETF’s or talking to a financial adviser about setting up your finances for the future. 

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Article originally published by Alex Brewster on 9 September 2019, updated by Rachel Horan 13 December 2021

Photo by Sven Mieke on Unsplash