Compare the Pair: Getting the age pension and still having a job.
In this example, we look closely at Bob and Glen. They are both work a 3 day week for the same rate of pay, and have both just turned 66.5 - so both are eligible to apply for the age pension.
A close look at the impact of their income on their age pension and entitlements tells a different story for each of them based on factors outside their job - like their income and asset position, marital status, and whether they are renting or not.
The impact of their new household income situation will be good to know if they are looking at the impact of changing their working hours alongside age pension eligibility and associated entitlements.
Importantly - the potential increase in household income after applying for the age pension, while still working, means re-evaluation of the impact of work on household budgets.
The key difference between the situation of Bob and Glen, is that Bob has more superannuation (Bob @ $400k vs Glen @$50k), and Bob owns his home while Glen rents his place for $740 f/n.
Q: I’m still working. Can I get the age pension?
A: Yes you can.
Working does not prevent you from being eligible for the age pension. In fact, the government offers incentives for you to work by shielding some employment income from the age pension income test via the Work Bonus. The benefit of the work bonus depends on your asset, income and work situation - more reason to understand how the system works.
As a first step it is worth knowing the following:
Your pension eligibility based on your current working situation
Your pension eligibility if you stopped working.
What we are going to look at here is an extension of the above - a clear link between your work and your household income now you are eligible for the age pension.
Remember - household income is made up of many parts - and we look more closely at that here.
How much can you get?
In the case of Bob and Glen, the impact to their household income now they are eligible for the age pension is quite different.
If Bob were to stop work, he would be eligible for an Age Pension of about $260 per week - which is significantly less than Glen. Having said this - Bob has his Superannuation assets to help supplement his income for living costs, as well as the benefit of owning his house (which could also be used to provide income via the Government Home Equity Access Scheme).
For Glen - the situation is different. The ability to top up his employment income with age pension is higher ($181 if he continues to work 3 days a week) , and he is also now eligible for Rent Assistance ($71/week).
The fact that Glen does not own his home, and has only a small amount of superannuation savings ($50k), means that he is able to gain more support from the government due to Centrelink means testing outcomes. This also makes his decisions around work dramatically more important, because he does not have the benefit of substantial savings or the certainty of owning his own home.
What happens next?
You can see that Glen’s potential increase in income is much greater than Bob’s, because he is eligible for more age pension and rent support.
So they have the same job - but now quite different income outcomes.
This is where the choices get a little more interesting.
A closer look at Bob’s situation.
Bob can review the days he works and work out how much better off he is for each extra day.
Now that Bob is eligible for the age pension he can look closely at the impact of each day’s work on his final income.
Keep in mind - it’s not just the potential for age pension income that is included in these numbers - it’s the impact of tax, the Medicare levy, 2 tax offsets that were available to him when working and a new tax-offset - the Senior and Pensioner Tax Offset (SAPTO) that will now apply.
Not included in the numbers is all the benefit of having a Pensioner Concession Card - and the impact of these associated entitlements is significant.
Another way to look at Bob’s choices is to work out the benefit to his household income based on the decision to work another day.
Bob’s first day’s income comes directly to his bottom line - as it is not taxed, and it does not impact any of his entitlements.
Day two sees a slight reduction in age pension, as well as tax cost.
On Bob’s third day, his extra income is having a big impact on his age pension (as well as his tax liability), meaning that out of the $280 his employer will pay him, his household budget will only improve by $76. So for each $35 of pay per hour, his situation improves by $9.50 - that’s like a tax rate of 73%.
With a clear view of the impact of his age pension eligibility on his financial situation, he may decide to reduce his working week to two days, with only a marginal impact on his household income - because he understands that the benefit to his household income is far less than what his employer is paying.
In the chart above, you can see the impact of age pension eligibility as the overall rate of income increases.
In the chart above, the impact of each day’s income is measured as a cost where the higher income results in a reduction of age pension or increase in overall tax.
Glen get’s more support, but has less safety
Glen’s after-tax income will increase significantly when he applies for the age pension. This is not just because of his age pension outcome, but also access to rental assistance.
Also - if he wants to reduce his working days and maintain income at a similar level, he is still better off, even when reducing his working days from 3 to 1.
A closer look at the household income impact of his working days shows that for his 2nd working day (and for the rest of the week), the impact of a day’s work ($280 from his employer), means a household impact of just over $80 per day.
Put another way - where he is being paid $35 per hour for working more than 1 day per week, he is only better off $10 per hour.
Meanwhile, Glen is renting, and has little savings to supplement his age pension and rent assistance income if he were to stop work completely.
As a minimum, Glen should understand the financial impact of his work on his overall household income - especially if he is finding work difficult, or is nervous about his job security.
In the chart above you will see Glen is eligible for maximum age pension and rent assistance if he stops work.
You can see that Glen can work one day a week with little impact on his age pension. More than one day and the impact on his overall household income is much less than what his employer pays him.
We work for different reasons
This work is a purely financial view of the benefit of work, and for different people the rewards from work are more than just financial.
Also - many may not have the flexibility to simply dial their hours up or down to suit their needs.
For those who work as a necessity to live, for those who may be wanting to work less, this kind of analysis is vital - and complex.
This analysis does not look at the challenges of planning lifetime spending, and optimising an amount of savings to retire on - the question we answer here, is the impact of work on household income.
A few things to note:
These examples are based on real people. In some cases, people working past pension age have not realised they are eligible for the payment due to a lack of knowledge, and have had tremendous relief to find there is less pressure to earn money from work.
Generally speaking, the people with the most to gain are those on lower incomes with less savings for retirement. Quite often these people may be working longer and harder than they want to be at their age. It is quite a pleasure helping these people understand their options.
This analysis comes to you after crunching through many government rules. All the information is public, and can be mapped out by checking with Centrelink and the Australian Tax Office.
In order to bring you these examples, we have made simplifications. (At this stage) we have not taken into account compulsory employer superannuation contributions. We have also assumed any cash in the bank earns 0.25% annual interest, and that Bob and Glen have household assets of $2k in total, and no other financial or personal assets or income streams of value beside those in the example.
Also - importantly, this analysis takes an “annual view” - that is, we assume a consistent pattern for a year - like working one day, two days or 3 days. In Centrelink terms - they look at income for the previous 2 weeks - so a change at any time during a financial year can have an impact.
Finally - this is kind of work looking at the decisions of Australians working and reaching pension age is new. It’s highly technical, and we hope it’s going to be really helpful. Any feedback on the ideas and the analysis, and how it may be applied or improved would be much appreciated.
Brendan
0412 181 031