How best to handle retirement payouts without jeopardising the age pension

I do have a financial planning question. I’m 64 years old and working for a government statutory body, which is Legal Aid Qld. I’m also a member of the Centrelink pension bonus scheme. I earn approx $50,000 pa, but salary sacrifice a bit less than 50% of this. That’s made up of the max amount of 7% (I think) of my pay into super, and the remainder on bills. I don’t make voluntary contributions other than the co contribution, which doesn’t gain me a great deal. I plan to retire in October 2011 when I’m 68 and have completed five years of working from my retirement age of 63. I’m single and my superannuation by then will be approx $200,000.

My question is that I have eight months or so of long service leave owing to me, which is quite a large amount of money. I’m not sure how this will affect what pension I will receive if I’m paid out in a lump sum on retirement. Whether it would be best to receive the lump sum or to retire eight months earlier than Oct 2011 and receive it as paid leave. I’d prefer the former as I need to replace my car to see my days out but don’t want to jeopardize the pension bonus payment or what part pension I might be eligible for. Many thanks. Roberta Smith

Response:

It is always tough for retirees to balance out the desire to maximise their assets and their Centrelink entitlements at the same time. On the one hand your investment assets are your nest egg for self funding a dignified retirement, hopefully complimented by a nice home and a reliable modern car (or two!); and on the other hand, the better you set yourself up – the worse your Centrelink link entitlements become. And the Pensioner Concession Card seems to be the Holy Grail, so for many it’s a big decision to throw that away!!

So where do you draw the line? Where does it make sense to qualify for social security at the cost of your own longer term self funding and welfare?

The Pension Bonus Scheme (PBS) is a tax free lump sum bonus for people who work past age pension age and defer claiming the Age Pension. Surprise, surprise the Pension Bonus Scheme is not as simple as it seems. For example: it cannot be paid if you have received income support (except Carer Payment) since meeting age and residency criteria for Age Pension.

Mostly, and certainly to start with, you see the propaganda: “Your country needs YOU! Work an extra 5 years for Australia and we’ll reward YOU! Do your bit and and we’ll pay you a tax free lump of $33,409.50 if you are single or $27,910.50 EACH if you are a couple!” Now this is certainly true, but the word that is often missed by pre-retirees is an important one – the aforementioned payments are the “maximum” entitlement (as shown below).

Pension Bonus Scheme

You must register with Centrelink to become a member of the PBS. To become a member, you must qualify for the Age Pension (but not necessarily be eligible) and register within 13 weeks of reaching age pension age.

To get the Pension Bonus, you must accrue between 1 and 5 bonus periods while deferring the Age Pension. Generally a bonus period runs for one year, but part years are counted once the first 12 month period has been accrued. To accrue a bonus period, you must pass the work test for that period and you cannot accrue a bonus period after age 75.

Got that? OK, so then to fulfil the work test, you must work a minimum of 960 hours per year with at least 640 hours worked in Australia. If you do not work, but your partner works, you can still register to become a member and use your partner’s work to pass the work test – so that is a really good advantage for members of a couple. You should keep a record of your hours worked or a work diary to prove your hours to Centrelink when you claim.

And now you are ready to claim. The amount of Pension Bonus paid is based on how long you have deferred the pension from date of registration as an accruing member of the scheme, if you are single or a couple and most importantly, the rate of age pension payable at date of claim. The whole bonus payment hinges on your age pension fortnightly entitlement at the time of claim. The more self funded you are, the less your age pension entitlement and therefore the smaller your Pension Bonus lump sum payment.

Imagine you qualify for $5,850 per annum (or $225 per fortnight) age pension and you are a couple. Then according to the formula below, you would actually get a bonus of $6,836.70 each after deferring for 3.5 years.

Now the lump sum is nice to have all the same, so it is certainly worth registering for the scheme – just understand what it means for you.

There is a small sting in the tail too. When you get paid the bonus, you are then obliged to report to Centrelink that you have more money in the bank – which then counts towards you assets and income test and further reduces the ongoing age pension that you will receive!

After all that, we get to the discussion around the impact of long service leave and Centrelink. If you get paid a big lump sum for long service then you will have a higher bank balance (or new car to add to your assets list) when you go to claim. This will reduce your age pension entitlement and therefore will also reduce your Pension Bonus lump sum. On top of that, your tax bill could be be higher than expected if you retire towards the end of financial year due to all your other earned income.

Most of our clients seem to like taking the long service leave as paid leave. They get to leave work earlier, continue building superannuation, lower the tax if the leave can be planned in a new financial year, and if they really hate retirement, then there’s an easy out to return back to the same job – even if it’s just part time.

Whether you go for the lump sum long service leave or take it as leave, really depends on your personal circumstances. Leaving work early and taking the leave is a lifestyle decision that may give you more Pension Bonus but not a new car without using your other super. Taking the lump sum gets you a car, but reduces the Pension Bonus scheme.

To assess the detailed Centrelink impact you could talk to a Centrelink Financial Information Services Officer. They can help with all these calculations for free but they can’t give you advice to make a decision either way. You might find that due to the way Pension Bonus Scheme is calculated, you will lose say $10,000 of the bonus by taking lump sum leave. Now if the lump sum leave is heaps more than this after tax, and it gets you the car you want, well, that might have to be the way to go.

Disclaimer: This article is general in nature and is not intended as investment advice. Readers should always seek further advice before making any financial decisions.

Jeremy Gillman-Wells is an Authorised Representatives of AMP Financial Planning Pty Limited | ABN 89 051 208 327 | AFS Licence No 232706.