How Do Gifting & Inheritance Affect Your Age Pension?
Gifting or financially contributing to friends or family can bring you a great sense of satisfaction. Helping out younger members of the family or friends who are in need, can be pleasurable as well as fulfilling. At the same time, if you are on the other end of that equation, receiving a financial gift or inheritance can mean a lot for your financial position too.
As financial advisers, we assist our clients through different life stages. As such, we are often involved in discussions with clients who benefit from inheritance or those who are planning on gifting their assets. In either case, we must know the direct or indirect impacts on Age Pension.
Here in Australia, the gifting and deprivation rules are designed in such a way that they prevent one from giving away assets or income over a certain level. The key to the underlying calculations is understanding the allowable disposable limits that are applicable. Armed with this information and with the help of trusted financial advisers, you may be able to have a clearer understanding of your financials and how gifting and/or inheritance can affect your retirement plans.
What is gifting?
Gifting isn’t just about giving away some of your savings or assets, there are several scenarios where gifting rules may be applicable, for example:
Forgiving someone a loan they owe you
Transferring shares or an investment property to someone for less than the true value
Giving up control of a company or trust which holds some assets
Lending money without a loan agreement
Gifting can be a smart and viable strategy. In fact, gifting within certain limits can give you a sense of satisfaction and also slightly increase your Age Pension entitlement. However, one must be cautious to not exceed these limits or the gift will continue to be treated as an asset for a period of time, even though you no longer hold it.
How much can you gift?
The amount that you can gift each year is your “allowable disposal amount”. This is the most you can give without affecting your Age Pension benefit. It is also called a gifting free area.
There are two tests to determine if you are within the allowable gifting limits. Firstly, individuals and couples combined can gift up to $10,000 per financial year or up to $30,000 over a five financial year period.
Gifting and Age Pension
The deprivation provisions in Australia are designed to limit the recipient’s potential to reduce their own assets, and as a result, impact their benefit entitlements.
When a person gives away, destroys, and/or diminishes the value of an asset or gives away an amount in excess of the allowable disposable amount, the individual is treated as continuing to hold the asset under the assets and income test for a period of five years from the date of the gift. And so, the excess amount is treated as an asset under the assets test and deemed under the income test.
What is inheritance?
Receiving an inheritance should be considered a blessing for your financial position. However, a lump sum inheritance may or may not affect your Age Pension positively. Different lump sums may be treated in different ways.
Largely, inheritances are exempt from the income test. This is true for any of the following types of inheritances that are:
not for a service
unlikely to happen again
hard to predict
Inheritance and Age Pension
The inheritance may be exempt from the income test. However, that doesn't necessarily mean that the inheritance won't affect the Age Pension entitlements. What you decide to do with the inheritance may still affect you under the income and assets test.
For example, if you spend the inheritance on an exempt asset such as home renovations, mortgage repayments, or purchase of medical equipment, you would still be exempt from the assets test. On the other hand, if you buy a non-financial asset such as an artwork, a boat, or a holiday home, it will be counted towards your assets test.
Working with Oakmont
Planning is key to maximising pension entitlements and Centrelink benefits. A vital part of any planning process is knowing what your available avenues are. This is where Oakmont Financial can help. We strategically assist you in maximizing your social security entitlements which can help make your own money last longer. To know more, contact us today.
General Advice Disclaimer
The information contained on this website and in this blog post is general in nature and does not take into account your personal situation or circumstance. It is recommended that you consider and use the information provided responsibly and, where appropriate, seek professional advice from a financial adviser.
Although every effort has been made to verify the accuracy and correctness of information, Oakmont Financial Group, together with our consultants, officers, agents, and employees, disclaim all liability for any loss or damage suffered by any persons directly or indirectly relying on this information.