How Defined Benefit Super Affects Your Age Pension: A Clear Guide

If you have a defined benefit superannuation fund, you might be wondering how it impacts your eligibility for the Australian Age Pension. The way these unique schemes are treated by Centrelink is very different from standard super funds, and understanding the rules is crucial for your retirement planning.

This guide will break down exactly how your defined benefit super is assessed, with a clear, step-by-step example.

The Two Phases of Defined Benefit Super

Like other super funds, defined benefit schemes have two key phases:

• The Accrual Phase: This is while you are still working. Your benefit grows based on factors like your final salary, years of service, and contribution history.
• The Retirement Phase: This is when you retire and start to access your benefits. Depending on your specific scheme, this could be in the form of a lifetime pension, an account-based pension, or a combination of both.

This guide focuses on how defined benefit income streams (lifetime pensions) are treated by Centrelink.

How Centrelink Assesses Your Defined Benefit Pension

Assessment During the Accrual Phase

If you are still in the first phase and accruing your benefit, the rule is very simple: your defined benefit interest is not assessed under either the assets test or the income test for Age Pension purposes.

Assessment During the Retirement Phase

Once you start receiving your defined benefit pension, the rules change.

• Under the Assets Test: A defined benefit income stream is not counted as an assessable asset. This is because, unlike an account-based pension, there is no capital amount or account balance supporting the pension payments.
• Under the Income Test: This is where your defined benefit pension is assessed. Centrelink calculates your assessable income using a specific formula:

Assessable Income = Gross Annual Payment - Deductible Amount

The 10% Cap Rule: The Most Important Detail to Understand

The "deductible amount" in the formula is the tax-free component of your pension payment. You can find this figure on your statement from your super fund.

However, there is a very important rule that applies to most schemes. As explained in the Social Security Guide (4.4.3.60), since the 1st of January 2016, the deductible amount for a defined benefit pension is capped at 10% of the gross payment.

This means that even if your tax-free component is much higher, Centrelink will only deduct a maximum of 10% of your gross pension when calculating your assessable income. In other words, for most people, at least 90% of their defined benefit pension will count towards the income test.

The main exception to this rule is for certain military defined benefit schemes, which are not subject to the 10% cap. For these schemes, the full tax-free component can be deducted.

A Step-by-Step Example: Calculating Your Assessable Income

Let's look at an example. John receives a defined benefit pension from a non-military public sector fund.

• His gross annual payment is $40,000.
• His tax-free component is $10,000 (which is 25% of his gross payment).

Under the Assets Test:

John's defined benefit pension is not counted as an asset.

Under the Income Test:

1. We start with the gross payment of $40,000.
2. We determine the deductible amount. Although his tax-free component is $10,000, the 10% cap rule applies.
3. The maximum deductible amount is 10% of his gross payment: $40,000 x 10% = $4,000.
4. His assessable income for Centrelink is: $40,000 - $4,000 = $36,000.

This means that $36,000, or 90% of his gross pension, counts towards the Centrelink income test.

What if it were a military pension?

If John's pension was from an exempt military scheme, the 10% cap would not apply. The full tax-free amount of $10,000 would be deductible, and his assessable income would be just $30,000.

What if his tax-free amount was lower?

If John's tax-free component was only $3,000 (less than 10% of the gross payment), the deductible amount would simply be $3,000. His assessable income would be $37,000.