Use income stream investments to minimise the Income Test

Many Australians over the age of 65 receive some form of Government pension assistance. In fact, many retirees seek to structure their investments in a way that maximises the benefit of both the social security and taxation rules.

Before you can qualify to receive the Age Pension, Centrelink assesses your retirement investments using stringent income and assets tests. Importantly, it is the income test rather than the assets test which usually causes pension benefits to be reduced. So if you want to maximise your entitlement to social security benefits, you should probably use investments that are treated favourably under the income test.

Many types of investment, including term deposits, direct shares and unit trusts, are subject to the Government's deeming rules. Under the deeming rules, investments are deemed to earn a specified rate of interest, regardless of the actual income they generate. And the deemed interest rate is fully counted under the social security income test.

By contrast, income stream investments, such as allocated pensions and immediate annuities, receive a more generous income test assessment. As a result, an income stream investment can be a very effective way to minimise your income for social security purposes and thereby maximise your entitlement to social security benefits.

How does the strategy work?

The strategy essentially involves the purchase of a Centrelink-friendly income stream. As a general rule, income payments from an income stream investment are counted under the income test, but any capital returned as part of the payments is exempt.

This exempt amount is known as the social security "deductible amount" (not to be confused with the deductible amount for tax purposes). It is usually calculated by dividing the purchase price of your income stream by your life expectancy or by the fixed term of the income stream.

The income test only counts the difference between the income payments and the deductible amount.