A Strategy to increase the Pension when Have Too much in assets

The assets test can prevent someone from getting a full or part aged pension. A way around this might be to ‘double dip’ by spending up to reduce your assets. But that is wasteful. Spending $150k wastefully just to get an extra $10k doesn’t seem to be wise (yet people actually do this!).

A better way would be to upgrade the main residence. But this is also wasteful in terms of suffering stamp duty and other costs – you will lose roughly 10% of the value in selling one house to acquire another.

Another solution is to build a granny flat or second dwelling in the existing house. This will use up a chuck of cash, but also add value to the property.

As long as the granny flat is not rented out, or family stay there it will be treated as a part of the main residence and there will be no income taken into account.

This could help a person both get the pension as well as help family out by allowing them cheap accommodation.

Section 11A(1) of the Social Security Act

As of July 2019 the assets test for a single pensioner is $258,500 for a home owner. That is a single pensioner can have assets of $258,500 or less, other than their home, and still get the full pension.

Example

Homer’s wife Marge just died and he is on a single pension. He has a $400,000 house on a large block as well as $400,000 in the bank. Homer could get a part pension only with his assets exceeding the assets test level.

His pension would be $12,836 per year

If he used $141,500 to build a granny flat the pension would jump to $22,509 pa

Using this great calculator: http://yourpension.com.au/APCalc/index.html#CalcForm

Homer uses $141,500 to build a granny flat in the back yard.

His pension increases by almost $10k per year.

He let’s his son Bart stay there and Bart helps around the home. Bart is now saving $300 per week on rent – so he is $15,000 per year better off.

If Bart moves out or if Homer ever needs more money he can always rent the granny flat out, but this would reduce his pension. If he rented the flat out for $300 pw he would get $15,000 pa rent plus $16,377 for the pension. $31,377 pa

He could also sell the property by about $180,000 more with the granny flat

So, all up building the granny flat has benefitted Homer in at least 4 ways:

  1. Larger pension
  2. Family close by
  3. Potential rental income plus part pension making more cashflow than doing nothing – more than $31,377 compared to $12,836
  4. Greater tax free capital asset for him and his family (if rented won’t be tax free completely)
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