Defined benefit pensions like CSS, PSS, or MSBS get two Centrelink advantages over account-based pensions: the income test uses a notional figure (actual pension minus a 'deductible amount' representing the member's own contributions), and the pension itself isn't counted as an asset. This often means DB pensioners qualify for a part Age Pension where an equivalent account-based pension holder, fully assessed on their balance, would not.
For Australian Age Pension recipients receiving defined benefit (DB) pensions — typically from public sector schemes like the Commonwealth Superannuation Scheme (CSS), the Public Sector Superannuation Scheme (PSS), the Military Superannuation and Benefits Scheme (MSBS), or older corporate DB funds — the Centrelink treatment differs substantially from how account-based pensions are handled. Two key features produce this difference: the income test uses a notional income figure rather than the actual pension amount, and the DB pension itself is generally not counted as an asset under the assets test.
Both features are typically favourable. Understanding them matters for DB recipients in their pre-retirement planning and for their advisers.
How does the deductible amount and notional income calculation work?
When Centrelink assesses a defined benefit pension under the income test, it does not count the full pension payment as income. Instead, it uses a notional income figure calculated by subtracting the "deductible amount" from the actual pension received.
The deductible amount represents the return-of-capital component of the pension — the portion attributable to the member's own contributions over their working life, rather than to investment returns or employer contributions. The deductible amount is calculated actuarially at commencement based on the member's age, their life expectancy, and the capital component of the pension. The figure is typically provided by the superannuation fund and appears on member statements.
For example: a DB pensioner receiving $40,000 per year from CSS with a deductible amount of $15,000 would have a notional assessable income of $25,000 — not $40,000 — for Centrelink income test purposes. Depending on other income and assets, this can make the difference between partial Age Pension entitlement and none at all.
The 10% cap on the deductible amount applies from 1 January 2016 (DSS Social Security Guide 4.9.2.30, https://guides.dss.gov.au/social-security-guide/4/9/2/30). The deductible amount is capped at 10% of the gross income from the defined benefit income stream. Three military schemes are excluded from this cap: DFRDB, MilitarySuper (MSBS), and DFRB. Recipients of those schemes may have deductible amounts above 10% of gross income depending on their tax-free component. (See related defined-benefit-pensions-centrelink article for full mechanics.)
What is the asset test position for defined benefit pensions?
For assets test purposes, defined benefit pensions are generally not counted as assets. A lifetime DB pension — which pays for the life of the member and is not a commutable account balance — does not have a market value that can be assigned and included in the assets count. This is a substantial advantage compared with account-based pensions, which are counted at their full account balance.
The practical effect is that a public servant who retires with a substantial CSS or PSS pension is assessed on their other assets (cash, investments, real estate outside the principal home) without the pension income stream itself bloating the assets count. A comparable retiree who accumulated the same wealth in an account-based pension would have the full account balance assessed and would face much lower means test thresholds before entitlement ceased.
Why do DB recipients often fare better than equivalent account-based retirees?
The combination of the notional income treatment and the absence of asset test counting means that DB pensioners are frequently in a better Centrelink position than retirees with economically equivalent retirement income streams held in account-based pensions.
Consider a retired senior public servant receiving $50,000 per year DB pension with a deductible amount of $18,000 — notional Centrelink income of $32,000 per year — and $300,000 in other savings. Their Centrelink income test is based on $32,000 and their assets test is based on $300,000. They will likely qualify for a partial Age Pension.
A retiree with no DB pension but with a large enough account-based pension to produce $50,000 per year income (which might require $1.0–1.2 million in account balance) would have the full account balance assessed, placing them well above the assets test cut-off of $722,000 (single homeowner), with no Age Pension entitlement at all.
What about public sector schemes like CSS and PSS?
The CSS and PSS are the most common DB schemes among older Australian retirees. Both typically produce pensions with deductible amounts that can meaningfully reduce the notional assessable income. The specific deductible amount for any individual depends on their personal contribution history, the benefit design, and their age at commencement — the fund administering the scheme (ComSuper, now the Australian Government Employees Superannuation Trust) provides the specific figure.
What happens to reversionary DB pensions?
When a DB pensioner dies and the pension reverts to a surviving spouse, the surviving spouse generally continues to receive the pension (at the full or partial rate depending on the scheme rules) and the deductible amount treatment continues. The specific arrangements depend on the scheme's reversionary provisions.
Should you choose a lump sum or ongoing pension?
Some DB scheme members, at the point of retirement, face an election between taking a lump sum and taking the ongoing pension. For Centrelink purposes, the pension is almost always the more favourable Centrelink outcome: the lump sum becomes a financial asset counted at full value with deeming applied, whereas the pension benefits from the notional income treatment and no asset count. Specific advice is warranted before making this election — the lump-sum-vs-pension decision involves tax, estate, and longevity considerations as well as the Centrelink position.
What are the practical steps for DB pensioners?
Confirming the specific deductible amount with the superannuation fund is the starting point — it should be on the annual member statement, but it is worth verifying that Centrelink has the correct figure on file. For DB recipients approaching Age Pension age, a specific Centrelink assessment before lodging the claim (or as part of the claim) that walks through the notional income calculation is useful in understanding the likely pension entitlement.
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Key takeaways
- Centrelink assesses defined benefit pension income using a notional figure — the actual pension received minus a 'deductible amount' representing the member's own contributions — rather than the full payment, which can be the difference between partial Age Pension entitlement and none.
- Since 1 January 2016, the deductible amount is capped at 10% of gross defined benefit income, except for three military schemes (DFRDB, MilitarySuper/MSBS, DFRB), which can have deductible amounts above 10% depending on their tax-free component.
- Defined benefit pensions are generally not counted as assets under the Age Pension assets test, since a lifetime DB pension has no market value or commutable account balance — a substantial advantage over account-based pensions, which are counted at full balance.
- This combination means a DB pensioner (say, $50,000/year with an $18,000 deductible amount, plus $300,000 other savings) can qualify for a part pension, while a retiree with an economically equivalent account-based pension (requiring roughly $1.0-1.2 million to produce the same income) would be fully assessed on that balance and likely receive no Age Pension at all.
- For DB scheme members choosing between a lump sum and an ongoing pension, the pension is almost always the more favourable Centrelink outcome — a lump sum becomes a fully assessed, deemed financial asset, while the pension retains the deductible amount treatment and asset-test exemption.
Frequently asked questions
How does Centrelink assess income from a defined benefit pension?
Centrelink uses a notional income figure calculated by subtracting a 'deductible amount' from the actual pension payment, rather than counting the full amount. The deductible amount represents the return-of-capital portion attributable to the member's own contributions, calculated actuarially at commencement based on age, life expectancy, and the pension's capital component. For example, a $40,000/year CSS pension with a $15,000 deductible amount produces a notional assessable income of $25,000, not $40,000.
Are defined benefit pensions counted in the Age Pension assets test?
Generally no. A lifetime defined benefit pension doesn't have a market value or commutable account balance that can be assigned and counted as an asset, unlike an account-based pension, which is assessed at its full balance. This means a retiree with a substantial CSS or PSS pension is assessed on their other assets only, without the pension itself inflating the assets count.
Why might a defined benefit pensioner get more Age Pension than someone with an equivalent account-based pension?
Because of the combined effect of the notional income treatment and the assets test exemption. A retiree receiving $50,000/year from a DB pension with an $18,000 deductible amount has only $32,000 counted as income and no asset counted for the pension itself. Someone drawing the same $50,000/year income from an account-based pension (needing roughly $1.0-1.2 million in balance) would have that full balance assessed as an asset, likely placing them above the assets test cut-off with no Age Pension entitlement at all.
Should I take a lump sum or ongoing pension from my defined benefit scheme?
For Centrelink purposes, the ongoing pension is almost always more favourable — a lump sum becomes a financial asset counted at full value with deeming applied, whereas the pension benefits from the deductible amount income treatment and isn't counted as an asset at all. That said, the decision also involves tax, estate planning, and longevity considerations, so specific advice is warranted before electing either option.