What is the 10% cap rule for defined benefit pensions?

The 10% cap rule limits the 'deductible amount' (tax-free portion) of your pension to 10% of the gross payment for Centrelink purposes. This means at least 90% of your defined benefit income is assessed under the income test.

Defined Benefit Super & Age Pension 2025: 10% Cap & Douglas Decision

Q: How does the Douglas Decision affect my Age Pension?

The Douglas decision primarily changes how invalidity benefits are taxed by the ATO (often favorably). Services Australia has implemented measures to ensure this change does not negatively impact your income support entitlements like the Age Pension.

If you have a defined benefit superannuation fund (like UniSuper, CSS, or PSS), Centrelink treats you differently. Unlike regular super, your balance is often asset-test exempt, but you get hit harder on the income test.

This guide explains the "10% Cap" rule and how the Douglas Decision affects veterans in 2025.

⚡ Defined Benefit Rules 2025

Assets Test: Usually Exempt (Your pension is not counted as an asset).
Income Test: Assessed via the "Deductible Amount" method.
The 10% Trap: For most civilians, the tax-free deduction is capped at 10% of the gross payment.
Veterans: Some military schemes (DFRDB/MSBS) are exempt from this cap.

Warning: Don't Confuse the Two "Caps"

There are two different "caps" that apply to defined benefits. It is vital you don't mix them up:

Name	Agency	What it does
10% Cap Rule	Centrelink	Limits how much income you can deduct for the Age Pension Income Test.
Defined Benefit Income Cap	ATO (Tax)	Limits your tax offsets if your pension income is huge (over ~$118k/year).

How Centrelink Assesses You (The 10% Rule)

Since 2016, Centrelink uses a strict formula for the Income Test:

Assessable Income = Gross Annual Payment - Deductible Amount

The Catch: The "Deductible Amount" (your tax-free component) is capped at 10% of your gross pension for most schemes. This means Centrelink assumes 90% of your pension is assessable income, even if your tax-free component is actually higher.

Example Calculation (2025 Rates)

Let's say John receives a $40,000 annual pension from a university fund.

Gross Pension: $40,000.
Tax-Free Component: His statement says $15,000.
Centrelink Cap: The 10% rule caps his deduction at $4,000 ($40k x 10%).
Assessable Income: $40,000 - $4,000 = $36,000 per year ($1,384/fortnight).

The Result: Since the single income-free area is only $218 per fortnight, John's pension reduces his Age Pension significantly (by 50 cents for every dollar over $218).

🎖️ For Veterans: The Douglas Decision

If you receive an invalidity pension (DFRDB or MSBS), the "Douglas Decision" changed how your payments are taxed (often treating them as lump sums to save you tax). Good News: Services Australia has implemented measures to ensuring this tax change does not negatively impact your Age Pension means testing.

Who is Exempt from the 10% Cap?

Not everyone faces the 10% cap. Check this table to see where you stand:

Scheme Type	10% Cap Applies?	Assessable Income
Public Sector / Corporate (e.g. UniSuper, CSS, PSS)	✅ Yes	Min. 90% of Pension
Military (Invalidity) (DFRDB, MSBS)	❌ No	Gross minus Full Tax-Free Component

Can You Fix This?

Defined benefit income streams are inflexible. You can't change the 10% cap. However, you can restructure your other assets (like savings or account-based super) to maximize your pension. Check out our guide on Age Pension Changes.