Effective Centrelink planning is often best demonstrated using a case study. The following is based on a real client scenario from 2017. Some facts have been changed to guard privacy.
Carl lives in a relatively small town in western Victoria. He is 64 and was receiving a disability support pension due to a long-standing an established health problem. He will become eligible for the aged pension in 12 months time. Given his health situation, Carl is living in straitened circumstances. He rents and has no particular personal assets other than his car, which is only valued at around $15,000.
Happily, he has recently received an unexpected and large lump sum of $1 million. This was great news for Carl! However, it did come with some catches. The amount of cash that Carl received was over the upper threshold for the assets test for the disability support pension. Therefore, once he received the money, all Centrelink payments ceased. In the short-term, Carl was not concerned that he had replaced the asset that Centrelink represents with a personal asset. However, he could see that the absence of external income stream would whittle away his newfound wealth. This was particularly the case because Carl’s first act was to give away a bit over $200,000 to family and very close friends. He was especially thrilled that his grandchildren are now being driven around in the safest cars available. He also made several donations to local sporting groups, took a trip, bought some nice furniture and bought himself a new car.
Happily, Carl went to see his adviser. The adviser made requalifying for a Centrelink benefit a key focus of their advice. Happily, there was a confluence of interests because the best Centrelink planning also happened to be the best personal financial planning – purchase a family home. Perhaps unfortunately (although not really) Carl lives in a part of the world where the best home in town cost no more than $400,000. This meant that Carl could purchase the best home in town and still have personal assets above the lower threshold for both the DSP and the aged pension. Basically, a part pension is as good as it is going to get for Carl for the foreseeable future.
That said, even a part pension will qualify Carl to receive a health care card. It is not hard to see the holder of a health care card saving at least $5000 a year through the concessions that that card makes available – especially given that Carl has ongoing health problems. So that benefit alone becomes substantial.
Because Carl would be left with a substantial amount of money after he purchases a home, he also needed some basic investment advice. So, let’s take up the story by extracting some relevant sections from the statement of advice that was presented to Carl. Note that the statement of advice also looks to educate Carl about dollar cost averaging as the most effective way of managing timing risk. Given that Carl is moving cash into growth markets, timing risk is one of the most substantial risks that his investment faces.
Your assets, liabilities and current insurances
|Assets||Value owned||Owned by|
|Industry super – CBUS||$5,400||Self|
You have indicated to us that you do not have any liabilities.
|Liabilities||Value||In name of|
Net Assets: $740,930
You are in the happy situation of having recently received a significant lump sum of cash. The only downside of this was that the cash receipt was such that you no longer qualify to receive a Centrelink pension. Requalifying you for some form of pension is therefore an essential first step in this advice.
Please note that it is our understanding that you would requalify for disability support pension were your assets to fall below the relevant thresholds. (That said, you will need to re-apply for that payment, which will require documentation and some patience on your behalf). It is also our understanding that the assets test thresholds for disability support pension are the same as the asset test thresholds for the aged pension. You are likely to become eligible for the aged pension in around 12 months. At this point, you would no longer be eligible for a disability support pension.
The main way to qualify (or requalify in the context of a disability pension) for a Centrelink benefit will be to purchase a family home. We address the specifics of this purchase below. The benefits of purchasing a family home are many. The three main ones are (i) you will always have a quality place to live; and (ii) you will be investing your money in a proven asset class such that the wealth should be at least maintained, if not enhanced over the remainder of your life; and (iii) wealth stored in a family home is not counted in the assets test for Centrelink purposes.
As outlined above, you currently have around $740,000 worth of assets. For Centrelink purposes, you need also to ‘add back’ to these assets approximately $190,000. This is the value of the gifts that you have generously given to various family members, minus an amount of $10,000 that you are ‘allowed’ to give away in a given year. Therefore, for Centrelink purposes your current assets are around $930,000.
For a single person who does not own a home, you will not be eligible for any amount of pension if your assets exceed $755,000. You receive a full pension if your assets are below $456,750.
For a single person who does own a home, you will not be eligible for any amount of pension if your assets (other than that family home) exceed $552,000. You receive a full pension if your assets (other than your family home) are below $253,750.
This means that purchasing a family home is your best chance to requalify for at least a part pension. The value of the home, including any stamp duties payable (see below) should be such that your non-home assets fall to below $552,000. This implies a minimum purchase price of around $380,000 (your Centrelink assets of $930,000 minus the upper threshold for homeowners of $552,000). If the home you purchase is worth less than this, then you will remain ineligible for a pension until your ‘natural spending’ reduces your non-home assets to below $552,000.
We will outline our thoughts about purchasing a property in the next section. But here we will also note that improvements to any property that you purchase (such as a repaint, renovations, landscaping et cetera) will also have the effect of reducing your nonhome assets. Therefore, when we talk about a ‘purchase price’ you might also include any modifications or improvements you might wish to make to the purchased property.
In addition, by ‘natural spending,’ we mean things like your day-to-day spending on lifestyle. This can include spending on things like travel – although only for yourself. If you purchase things on another’s behalf, this will be counted as a gift and will be added back to your assets for Centrelink purposes.
Even partial eligibility for a pension will also qualify you for other benefits such as a healthcare card. This will potentially be of benefit when it comes to seeking a reduction in the stamp duty payable on your purchase.
Purchase a property
We recommend that you purchase a residential property in which to live. Ideally, this property (after purchase costs and any modifications you wish to make) will be valued at at least $382,000, as this will reduce your assets such that you again start qualifying for a Centrelink benefit. This figure includes all fees associated with the purchase, such as conveyancing fees.
That said, the price of the property should not be the main driver of the property that you select. The main driver should simply be that the home be one in which you wish to live and can see yourself living in happily for many years to come. As discussed, we suggest that you purchase a house that could comfortably accommodate adult kids and/or grandkids if the need arises.
If the home that you most like is worth less than $382,000 (including stamp duties), you should still buy it. You will simply have to use your stored wealth to finance your lifestyle until your assets drop below the upper limit for assets for the aged pension. At that time, you will become eligible for a partial pension.
The important thing is that the quality of the home that you live in is the most important aspect of your decision. Things like optimising Centrelink are important – but not as important as buying the right home. So, let Centrelink work around the home, and not the other way around.
Property Fees and Charges
The costs associated with this purchase are as follows:
Purchase price$370,000 (estimate)
|Stamp Duty and other govt charges||$14,870 (maximum assuming no exemption)|
|Other (connection fees, etc)||n/a|
|TOTAL ACQUISITION COSTS||$385,870|
Our fees are shown separately below. Please note that there will also be annual expenses such as council rates and insurances.
At the moment, you’re holding approximately $710,000 in cash (including any short-term term deposits you may be using). As outlined above, we recommend that you use a substantial amount of this cash to purchase a family home. Once you have done this, you will still have some cash remaining. This section of our advice details how best to manage this cash.
The specific amount of cash will depend on the purchase price plus costs of your new home. Regardless of that price, we recommend that you retain $100,000 in cash or cash equivalent investment such as a term deposit. Which cash account or term deposit you use is really up to you – products offered by the major banks are all well regulated and very similar to each other, and it is often easiest simply to use your existing bank as they already have information such as your identification details.
This will leave an amount available to invest in the pursuit of higher growth. If we assume a house purchase price of $385,000, including all purchasing costs, and we wish to retain $100,000 as cash (or cash equivalent), this leaves up to $225,000 to invest. ($710,000 cash minus $100,000 to be kept as cash minus $385,000 for the property purchase). Between now and the time you settle on a property, you will probably have spent some more of your current cash. Therefore, we will assume a total gross investment amount of $200,000. As you will see, the investment amount is not the critical factor at this point. What is a critical factor is that you invest in a way that minimises risk.
In summary, using this figure of $200,000, we recommend the following investments and (ultimately) investment amounts:
|Platform/Investment Option Name||Invested Amount ($)||Investment Fee||PDS/PIS|
|Vanguard Australian Shares Index ETF||$100,000||$150 (0.15%)||PIS|
|Blackrock iShares Core S&P/ASX 200 ETF||$100,000||$150 (0.15%)||PIS|
|Your preferred cash savings or term deposit accounts||
Please refer to the PIS for each ETF that has been recommended. These contain important information that forms part of this statement of advice.
The recommended ultimate asset allocation and the risk profile variance is as follows:
|Your risk profile (balanced)||77.0%||23.0%|
|Variance (from model balanced portfolio)||(10.00%)||10.00%|
A ‘model’ balanced portfolio would normally suggest a slightly higher proportion of your assets to be held in the growth asset class. However, we have suggested that you retain slightly more in cash as the exact amount is to be invested are not yet known (and will not be known until you finalise your house purchase).
The proposed investment strategy will see you make significant investments into two exchange traded funds. Exchange traded funds enjoy various benefits as a way of making a diversified investment into the sharemarket. These benefits include heightened liquidity, lower fees, ease of transacting and diversification. Each of these ETF’s will eventually hold 33% of the value of your total non-home assets.
While the following investment process may seem complicated, please be assured that it is not. The rules for the provision of financial advice require that we provide comprehensive detail in this statement of advice. Once this advice is fully implemented, you will hold just three or four assets: two diversified exchange traded funds (which are held within the same online brokerage account) and one or two cash investments. One of the features of this investment strategy is actually its simplicity and the subsequently low investment fees involved.
The share market investments
Whenever investing into the share market, there are two particular types of risk that need to be managed. The first is ‘specific risk,’ which is the risk that shares in a specific company will fall in value as a result of poor business performance on the part of that company. Specific risk is best managed by diversification. The ETF’s that have been recommended will both provide substantial diversification across approximately 200 individual shareholdings within the Australian sharemarket.
The other substantial risk is timing risk. Timing risk is the risk that prices in a market generally will fall after an investment has been made. Prices in share markets are inherently volatile meaning that there is always a strong chance that an investment will be made at a price point higher than would be available at some other time.
Timing risk is best managed by separating the amount to be invested into smaller portions and investing these portions at different points over an extended period of time. If the same amount of money is invested at each point in time, then you will automatically purchase more units of the chosen investment when prices are lower.
Ultimately, you will invest approximately $200,000 (at today’s values) in each of the recommended investments. We recommend that the purchasing of these investments be spread over an 18-month period. An investment of approximately $11,111 should be made each month for the 18-month period. You can alternate which ETF you purchase each month. The following table sets out a proposed purchasing strategy:
|Month||ETF||Amt to purchase||Accumulated Investment|
|1||Vanguard Australian Shares Index ETF||$11,111||$11,111|
|2||Blackrock iShares Core S&P/ASX 200 ETF||$11,111||$22,222|
|3||Vanguard Australian Shares Index ETF||$11,111||$33,333|
|4||Blackrock iShares Core S&P/ASX 200 ETF||$11,111||$44,444|
|5||Vanguard Australian Shares Index ETF||$11,111||$55,555|
|6||Blackrock iShares Core S&P/ASX 200 ETF||$11,111||$66,666|
|7||Vanguard Australian Shares Index ETF||$11,111||$77,777|
|8||Blackrock iShares Core S&P/ASX 200 ETF||$11,111||$88,888|
|9||Vanguard Australian Shares Index ETF||$11,111||$99,999|
|10||Blackrock iShares Core S&P/ASX 200 ETF||$11,111||$111,111|
|11||Vanguard Australian Shares Index ETF||$11,111||$122,222|
|12||Blackrock iShares Core S&P/ASX 200 ETF||$11,111||$133,333|
|13||Vanguard Australian Shares Index ETF||$11,111||$144,444|
|14||Blackrock iShares Core S&P/ASX 200 ETF||$11,111||$155,555|
|15||Vanguard Australian Shares Index ETF||$11,111||$166,666|
|16||Blackrock iShares Core S&P/ASX 200 ETF||$11,111||$177,777|
|17||Vanguard Australian Shares Index ETF||$11,111||$188,888|
|18||Blackrock iShares Core S&P/ASX 200 ETF||$11,111||$200,000|
Making these investments is straightforward. You simply establish an online share trading facility with your preferred online broker. All major banks have one available and using the one linked to your current bank is typically the easiest way to go. You then transfer $11,111 into this facility on a given day each month. Once the funds have been received into the facility, which can take 24 hours or so, you purchase $11,111 worth of units in the particular ETF, including brokerage. The estimated brokerage for each transaction is $20. For 18 transactions, total brokerage should be around $360.
We can assist you with this process if necessary – although we always insist the clients actually manage their own money. This maximises security of your money management.
At first glance, the above investment strategy may appear overly conservative. However, the first rule of successfully managing an investment portfolio is to maximise the amount under investment. If the market falls over the next 18 months, then the gradual process of purchasing over time will enable you to benefit from that fall. Were you to invest all your money at once, and the market were to fall, you would not be able to take advantage of the consequent lower prices. Remember, we are investing for a 20 to 30-year timeframe, so taking 18 months to move the money into the sharemarket will not prove to be too long.
Please also remember that share markets rise and fall in the short term. There will be some years in which the value of your share investment falls compared to the previous year, as the prices available in the share market drop. This volatility is to be expected and is why we outline the above prudential approach to managing your assets for the long term.
Indexing as an Investment Approach
We have recommended that you invest in two different ETF’s. This might sound like a simple and small strategy, but we want to assure you that there is a lot of economic science and experience behind these recommendations.
The simplest and, as history shows, most effective method of investing in the sharemarket is via an index tracking exchange traded fund (ETF). Both economic theory and – crucially – economic experience show that indexing beats the average active investment portfolio, especially once fees and taxes are factored in.
This means an investor faces a choice when making a sharemarket investment. You can take the guaranteed above-average performance of an index fund (after fees and taxes) versus a possibility of obtaining an above-average performance from an ‘active fund manager.’ But remember, the active fund manager has to perform above-average year after year for a superannuation fund to be justified in using them. The probability of this happening becomes less the longer investment needs to last.
You may have heard of an investor named Warren Buffett. While he has made a fortune actively selecting companies in which to invest over his lifetime, index funds are his recommended investment option for the rest of us. Buffett is now in his 80s and has been investing since he was 11. When a person of his experience and effectiveness suggests that indexing is likely to be the best approach for the rest of us, this is worth listening to. You can hear Buffett’s thoughts in this video.
Finally, if you want to read a more detailed description of indexing and why it works, read this. This article is intended for financial advisers. You may find it dry, but if you really want to understand how best to use the sharemarket to store and create wealth over the long term, this article is dry but very helpful.
An investment in an index fund that tracks the ASX 200 will achieve the average of the ASX 200. So, if you watch the evening news and the presenter says the market went up or down by X% today, then your investment will have done the same thing. That said, in many ways we discourage you from checking how your investment is going on a day-to-day basis: the sharemarket is a place to store and create wealth over a long period of 10 years plus.
The Vanguard Australian Shares Index ETF and the Blackrock iShares Core S&P/ASX 200 ETF will essentially hold the same portfolio of shares. They also charge the same very low management fee. We recommend that you use these two investments simply to diversify between the fund managers.
Having decided to invest in an index-tracking fund, it makes sense to do so using the most efficient way of investing into such funds. Exchange traded funds use the mechanisms of the Australian Stock Exchange (including its compliance requirements) to deliver an efficient way of accessing fund management.
You can watch a video about ETF’s here.