Charles Penheiro - Aged Care Financial Planner & Annuity Specialist

How Annuities may increase your Centrelink Age Pension, Reduce Tax & Aged Care Fees

Annuities are a financial products that provide security of income.

You go to an insurance company and say you would like to purchase an annuity with X amount of dollars.

The insurance company then gives you a quote and say that given the value of capital you are willing to invest, they will pay you an income of $XX.XX for the rest of your life.

The benefit of such a product is that your income is guaranteed in spite of movements in financial markets.

Annuities work on statistics. A person who specialises in statistics related to finance is called an Actuary. They look at the funds you have to invest, age, life expectancy, health condition etc and determine how much they are willing to pay you.

In many ways it is like taking a bet. If you live beyond your life expectancy, then the insurance company has to continue paying you. However if you do not live beyond your life expectancy, then the insurance company no longer has to pay.

The above is a very basic understanding of annuities. Some providers will enable a return of capital after a certain period of time.

So how does it help for Centrelink Age Pension purposes?

Via a principle called the deductible amount.

Say you have invested $500,000 into an annuity and you are 65 years of age receiving $17,000 pa from the annuity.

A 65 year of Australian male male has a life expectancy of 19.22 years.*

$500,000 ÷ 19.22 = $26,014 pa. This $26,014 is known as the deductible amount.

For Centrelink purposes the income from the annuity is seen as:

The income from the annuity ($17,000) – the deductible amount ($26,014).

So in the above example this means that income = $0.00.

So for Centrelink purposes there is no income from the annuity. This may have the affect of  increasing the amount of age pension you receive.

If you held the amount in a fixed term deposit you would have been deemed to have been earning $15,512 under the deeming rules.

But remember, Centrelink do two tests. The assets test and the income test and the test that gives the lower rate of pension, is the test that applies.

However, the other interesting thing about the deductible figure is that it is used to depreciate the value of the initial capital invested.

So in year two, the value of the annuity asset will be $500,000 - $26,014 = $473,986.

Having a depreciating asset each year that reduces by the value of the deductible, may help to increase benefits under the Centerlink assets test.

The depreciating value of the annuity for Centrelink purposes is shown below:

Year 1:   $473,986
Year 5:   $395,941
Year 7:   $343,912
Year 10: $265,868
Year 15: $135,796
Year 20: $0.00

All the while the annuity itself is paying $17,000 pa and is not counted as income for Centrelink purposes.

Annuities purchased with superannuation monies are not taxed. However annuities not purchased with superannuation monies are.

However, as long as the deductible is greater than the income, as in the case above, then no tax is payable.

If the income were say $28,000 and the deductible as mentioned above, then the amount that would need to be declared for tax would be $1,986 ($28,000 - $26,014).

They description above in how Centrelink determine asset values and income for an annuity, also spills over into age care.

For when a person goes into age care the value of the annuity and income counted is exactly the same as for Centrelink purposes as it is for age care purposes.

The effect is that the means tested care fee charged for age care purposes is reduced.

*ABS Life Tables 2015

The above is general advice only and does not take into account your needs and objectives and personal financial circumstances.