BY WEALTH ADVISER
Here is a question that catches many Australians off guard: a couple sells their investment property for $600,000 and deposits the proceeds in a term deposit. They already own their home and have modest super. They assumed the sale would make them more comfortable in retirement. Instead, their Age Pension drops by several hundred dollars a fortnight. What went wrong?
Nothing, technically. The means tests did exactly what they were designed to do. The couple simply did not realise that moving wealth from one form to another — in this case, from an investment property to cash — changes how Centrelink assesses their entitlements. And that gap between expectation and outcome is one of the most common planning failures in Australian retirement.
Around three in five Australians over 67 receive some form of Age Pension. For many, it forms a significant share of their retirement income. Yet the system that determines how much you receive — two overlapping means tests that assess your income and your assets — is poorly understood even by people who depend on it. This article aims to change that, not by turning you into a Centrelink expert, but by giving you enough understanding to see why the means tests should be a central part of any conversation with your financial adviser.
Two Tests, One Pension
Centrelink applies two separate tests to determine your Age Pension entitlement: the income test and the assets test. Both are assessed, and whichever test produces the lower pension amount is the one that applies. This is sometimes called “the test that bites.”
For many retirees, the assets test is the binding constraint. But for others — particularly those with significant financial assets generating deemed income, or those receiving income from employment, rental properties, or foreign pensions — the income test can be the one that limits their payment. Understanding which test is driving your outcome is the starting point for any planning conversation.
The Assets Test
The assets test is conceptually straightforward. Centrelink adds up the value of your assessable assets — everything you own except your principal home — and compares the total to a set of thresholds.
Below the lower threshold, you receive the full pension. Above the lower threshold, your pension reduces by $3 per fortnight for every $1,000 of assets above that line. Once your assets reach the upper threshold, the pension cuts off entirely.
To give you a sense of scale, as at 20 September 2025 (these thresholds are reviewed three times a year), a homeowner couple can hold up to $481,500 in assessable assets and still receive the full pension. The part-pension cuts off entirely at $1,074,000. For a single homeowner, the corresponding figures are $321,500 and $714,500. Non-homeowners have higher thresholds — $739,500 and $1,332,000 for a couple — reflecting the fact that they need to fund their housing from their assets.
Your family home is exempt from the assets test, which is why it occupies such a significant position in retirement planning. But almost everything else counts: superannuation balances (once you have reached Age Pension age), bank accounts, shares, managed funds, investment properties at market value, household contents, vehicles, and any interest in trusts or companies.
The Income Test
The income test assesses income from all sources — not just employment. For most retirees, the largest component is deemed income from financial assets, but it also captures rental income, employment income (subject to the Work Bonus, discussed below), foreign pensions, and certain income streams.
A single person can have assessable income of up to $218 per fortnight and still receive the full pension. For a couple, the combined threshold is $380 per fortnight. Above those levels, the pension reduces by 50 cents for every additional dollar of income for a single person, or 25 cents per person per dollar for a couple.
The Work Bonus provides a significant carve-out for employment income: the first $300 per fortnight of earnings from work is not counted in the income test. Unused portions of this exemption accumulate in a “Work Bonus balance” up to a maximum of $11,800, which can offset future employment income in periods when you earn more. New pension claimants now receive a $4,000 starting balance in their Work Bonus account, giving them immediate capacity to earn more from work without affecting their pension. This is a genuinely valuable concession for retirees who do part-time or seasonal work.
Deeming: The Income Centrelink Thinks You Earn
This is where the system becomes less intuitive. Rather than assessing the actual income your financial assets produce, Centrelink uses “deeming” — a formula that assumes your financial assets earn a set rate of return regardless of what they actually earn.
As at 20 September 2025, the deeming rates are 0.75 per cent on financial assets up to $64,200 for a single person ($106,200 for a couple), and 2.75 per cent on everything above those thresholds. These rates were increased in September 2025 for the first time in five years, after being frozen at emergency low levels during the pandemic.
Deeming applies to all financial assets: bank accounts, term deposits, superannuation in pension phase, managed funds, shares, and account-based income streams. It does not apply to your home, your car, your furniture, or rental property (rental income is assessed separately at the actual amount received).
The deeming system creates both advantages and disadvantages. If your investments are generating returns well above the deemed rate — as many account-based pensions and diversified portfolios do — you benefit, because Centrelink assesses less income than you actually receive. Conversely, if you hold large amounts in low-interest savings accounts earning less than the deemed rate, you are assessed on income you are not actually receiving.
The September 2025 increase was modest — half a percentage point on both the lower and upper rates — but it was enough to reduce some part-pensioners’ entitlements. For each $100,000 in financial assets, the increase translated to roughly $10 less in fortnightly pension. If your adviser has not already reviewed the impact on your position, it is worth raising at your next meeting.
Which Test Is Driving Your Outcome?
Understanding which test currently constrains your pension — and whether that could change — is one of the most useful things you can establish with your adviser.
As a rough guide, the assets test tends to bite for people with moderate to high asset levels but relatively low investment income (or income that is sheltered by deeming). The income test tends to bite for people with lower asset levels but significant income streams — for example, someone with a defined benefit pension, substantial rental income, or a large foreign pension.
Many financial decisions shift the balance between the two tests. Selling an investment property, for instance, may not significantly change your total assessable assets — the property’s market value was already counted — but it replaces a directly assessed income stream (actual rent) with deemed income on the cash proceeds, which can change which test bites and by how much. Whether that shift is beneficial depends entirely on the numbers in your specific situation — which is precisely why Centrelink modelling should be part of any major financial decision in retirement.
Common Traps: When Good Decisions Have Bad Centrelink Outcomes
The means tests interact with financial decisions in ways that are not always obvious. Several common scenarios catch people out.
The first is gifting to children. Many retirees want to help adult children with a home deposit, a business, or education costs. Centrelink allows gifts of up to $10,000 per financial year, with a cap of $30,000 over any rolling five-year period (the same limits apply whether you are single or a couple). Exceed those limits and the excess is treated as a “deprived asset” — Centrelink continues to count it as though you still own it, for both the assets test and deeming purposes, for five years from the date of the gift. A well-meaning $50,000 gift to help with a house deposit means $40,000 remains on your Centrelink books for half a decade, reducing your pension as though the money were still in your bank account.
The second is downsizing and the family home. Your home is exempt from the assets test. If you sell it and buy a cheaper property, the difference in price lands in your assessable assets. A couple who sell a $1.5 million home and buy a $900,000 apartment have just added $600,000 to their assessable asset base — potentially wiping out their pension entirely. The downsizer contribution scheme (covered in detail in a separate article in this series) allows people aged 55 and over to contribute up to $300,000 per person from home sale proceeds into super, but those super balances are then assessable assets too. The planning here is about understanding the trade-offs, not avoiding change altogether.
The third is paying off a mortgage with super or savings. A mortgage on your principal home is not deducted from your assessable assets — your home is simply exempt. But if you withdraw $200,000 from super to pay off the mortgage, you have removed $200,000 from your assessable assets (since the super was assessable) and converted it into home equity (which is exempt). This can actually improve your pension position. The reverse, however, catches people: drawing down on your home equity through a reverse mortgage or the Home Equity Access Scheme adds to your assessable financial assets.
The fourth is restructuring investments without considering Centrelink. Moving from a rental property (where actual rent is assessed as income) to a managed fund (where the entire balance is deemed) can change which test bites and by how much. So can consolidating multiple super accounts, switching from accumulation to pension phase, or changing the mix of assets within a portfolio. None of these moves are inherently good or bad — but each has a Centrelink consequence that should be modelled before you act.
The Family Home: The Biggest Planning Variable
Because the principal home is exempt from the assets test regardless of its value, it occupies a unique position in the means test framework. A couple living in a $3 million home with $400,000 in other assets qualifies for a full pension under the assets test. A couple renting with $1.2 million in super and savings may receive no pension at all.
This is not a reason to buy the most expensive home you can find — housing decisions involve far more than pension entitlements. But it does mean that any decision involving your home has outsized Centrelink implications. Downsizing, renovating, moving into aged care (where the home’s exempt status can change depending on whether a partner remains living there), or transferring the home to family members — each of these triggers means test consequences that should be carefully modelled.
For readers considering aged care planning, the interaction between the family home and the means tests is particularly consequential and was explored in more detail in a separate article in this series.
Discussion Points for Your Adviser
The means tests touch almost every significant financial decision in retirement. Several questions are worth raising at your next review.
Which test — income or assets — is currently determining your pension amount, and by how much? If you are considering selling or restructuring any asset, what does the Centrelink modelling show in terms of pension impact over the next three to five years? Have the September 2025 deeming rate increases affected your position, and is there anything worth adjusting in response? If you are planning to help family members financially, are you aware of the gifting limits and the five-year deprivation rules? If downsizing is on the horizon, what are the pension implications of different price points for a new home — and does the downsizer contribution change the calculus? For couples, what happens to the surviving partner’s pension position if one partner passes away — given that asset thresholds drop significantly and the home’s exempt status may change?
The means tests are not designed to penalise you. They are designed to target government support toward those who need it most. But they are complex enough that well-intentioned financial decisions can have unintended consequences. Understanding the framework — and making sure Centrelink modelling is part of your adviser’s toolkit — is one of the most practical things you can do to protect your retirement income.
References
1. Services Australia. “Age Pension — income test.” Current thresholds and taper rates, applicable 20 September 2025 to 19 March 2026. servicesaustralia.gov.au.
2. Services Australia. “Age Pension — assets test.” Current thresholds for homeowners and non-homeowners, applicable 20 September 2025 to 19 March 2026. servicesaustralia.gov.au. 3. Services Australia. “Deeming.” Explanation of deeming rules, current rates (0.75 per cent / 2.75 per cent from 20 September 2025), and financial asset thresholds. servicesaustralia.gov.au.
4. Minister for Social Services. Announcement of deeming rate increase, 20 August 2025. Rates effective from 20 September 2025.
5. Services Australia. “Gifting.” Deprivation rules, $10,000 per year and $30,000 per five-year rolling limits, assessment of deprived assets.
6. Australian Institute of Health and Welfare. Income support receipt by older Australians. Approximately 2.8 million Australians aged 65 and over receiving income support as at March 2023.
7. Department of Social Services. “Resetting the Social Security Deeming Rates — Impact Analysis.” August 2025. Analysis of impact on pension recipients from deeming rate increase.
8. SuperGuide. “Age Pension rates (September 2025 to March 2026).” Comprehensive reference for current pension rates, thresholds, and means test parameters.
