The Age Pension income test: what Centrelink counts as income, and how your pension is affected

The Age Pension is subject to two simultaneous means tests — the assets test and the income test. Both run at the same time, and the one that produces the lower pension amount is the one that applies to you. Many retirees focus on one and underestimate the other. This article explains the income test — how it works, what counts as income (and what doesn't), and where the most common surprises come from.

The income test reduces your Age Pension by a set amount for every dollar of income above a threshold called the income free area. For a single Age Pensioner, the income free area is $218 per fortnight — income up to that amount has no effect on the pension. For every dollar above $218 per fortnight, the pension reduces by 50 cents. For a couple assessed together, the combined income free area is $380 per fortnight, and each partner's pension reduces by 25 cents for every dollar of combined income above $380 — an equivalent effective taper on the combined payment. The reduction continues until the pension reaches zero: the income cut-off point is $2,619.80 per fortnight for a single pensioner and $4,000.80 per fortnight combined for a couple (as at 5 May 2026). These thresholds are indexed and reviewed periodically.

What does Centrelink actually count as income?

What Centrelink defines as income for the income test is not the same as what you might expect. Employment income — wages, salary, director's fees, self-employment income — is assessed in full before the Work Bonus concession is applied (discussed below). Rental income from investment property is assessed net of allowable deductions, similar to how it would be reported in a tax return. Defined benefit pension payments — the kind that arrive from a government employer scheme such as the Commonwealth Superannuation Scheme or State Super — are assessed directly as income. The same applies to overseas pensions from foreign governments.

How does deeming treat financial investments?

For financial investments — shares, bank accounts, term deposits, managed funds, and account-based pensions opened after 1 January 2015 — the income test does not assess actual returns or dividends. Instead, Centrelink applies deeming rules: the total market value of those financial assets is multiplied by a set rate, and the resulting deemed income is what goes into the income test, regardless of what the assets actually earn. As the DSS Social Security Guide records: "The actual returns received (if any) from financial investments are not assessed under the income test unless the Minister exempts the investment from the deeming rules." In practice, this means that dividends and franking credits from a share portfolio are not directly counted as income — the portfolio's market value is deemed under the standard financial investment rules instead.

The current deeming rates are 1.25 per cent per annum on the portion of financial assets up to the threshold, and 3.25 per cent on the balance above it (rates set 20 March 2026). Following the 1 July 2026 indexation, the threshold is $66,800 for a single pensioner and $110,600 for a pensioner couple, up from $64,200 and $106,200 respectively. The 1.25%/3.25% rates themselves were raised from 0.25 and 2.25 per cent over the course of late 2025 and early 2026, ending a freeze that had been in place since May 2020. Retirees who had grown accustomed to minimal deemed income from their financial assets should be aware that the March 2026 rate increase means their assessed income position has shifted materially even if their portfolio has not changed. For a single pensioner with $300,000 in financial assets above the threshold, the increase to 3.25 per cent adds approximately $3,000 per year in deemed income compared to the prior 2.25 per cent rate — which, at the 50-cent taper, reduces pension entitlement by around $1,500 per year.

What about account-based pensions opened before 2015?

Account-based pensions opened before 1 January 2015 by people who were already receiving a Centrelink income support payment at that time may be assessed under grandfathered rules rather than deeming — specifically under an older approach that assessed only the income component above the calculated deductible amount. This grandfathered treatment is valuable and is lost permanently if the pension is commuted and restarted. Anyone holding a pre-2015 account-based pension should check with Services Australia before making any change to that pension's structure.

The grandfathered "deductible amount" method calculates assessable income as: annual pension payment − deductible amount, where the deductible amount = (initial purchase price − commutations since commencement) ÷ relevant number at commencement. The "relevant number" is generally the member's life expectancy at the pension's commencement (per the Social Security Guide formula). All required figures are listed on the Centrelink Schedule issued by the pension provider. Both conditions must be continuously met for grandfathering: the member must have held the pension before 1 January 2015 AND have been continuously receiving an income support payment since. Note: the equivalent CSHC grandfathering provides FULL EXEMPTION rather than the deductible-amount method.

How does the Work Bonus reduce assessed income?

For pensioners who continue to work in retirement, the Work Bonus provides a meaningful concession. Services Australia adds $300 credit to each pensioner's Work Bonus balance every fortnight. When employment or self-employment income is earned, the Work Bonus balance is applied to offset that income before the income test is run — so earnings up to $300 per fortnight can be reduced to zero for income test purposes. Unused credit accumulates, up to a maximum balance of $11,800. The practical effect is that a pensioner who doesn't work for several months can build up a substantial buffer and then absorb a burst of seasonal employment or a one-off contract payment without it affecting their pension. The Work Bonus applies only to earned income — wages and self-employment — not to investment returns or deemed income.

How is the income test applied for couples?

For couples, the income test uses combined household income, which is then halved for assessment purposes. Each partner is effectively assessed on half the combined income. This means that one partner with higher income than the other affects both partners' pension amounts equally. Where one partner is below Age Pension age, their income is still generally included in the combined income assessed against the Age Pension recipient.

For most retirees, the practical question is which test — income or assets — is the one currently limiting their pension, and by how much. A retiree with a large investment portfolio may be assets-test limited well before their income becomes an issue. A retiree receiving a defined benefit pension alongside a modest personal asset base may find the income test is the binding constraint. Understanding which test is in play, and how far they are from each cut-off, shapes what planning steps — if any — are likely to improve their pension outcome. Modelling both tests against a specific position is a conversation worth having with a financial adviser.

Sources

• Services Australia — Income test for age pension
• Services Australia — How work bonus works
• DSS Social Security Guide 4.4.1.10 — Overview of deeming
• DSS Social Security Guide 4.4.1.30