In short

For non-account-based pensions like defined benefit and complying income streams, Centrelink excludes a "deductible amount" — the return-of-capital portion — from assessable income under the income test. Since 1 January 2016, this deductible amount is capped at 10% of the gross pension for most schemes, but military defined benefit pensions (DFRDB, MilitarySuper, DFRB) are excluded from that cap entirely.

For Australian retirees receiving non-account-based pension income streams — defined benefit (DB) pensions from Commonwealth, state and corporate schemes, military DB pensions, complying lifetime pensions and term-allocated pensions (largely legacy products), and certain lifetime annuities — Centrelink's income test treatment differs materially from how account-based pensions are treated. Rather than count the gross pension payment as assessable income, Centrelink excludes a portion called the deductible amount — representing the return-of-capital component of each pension payment. The deductible amount is broadly the pension's purchase price divided by the relevant number (typically the pensioner's life expectancy at commencement). From 1 January 2016, a 10% cap was added for most DB pensions — but, importantly, military DB pensions are excluded from that cap. Getting the deductible amount right is genuinely consequential: errors can quietly cost an Age Pensioner thousands a year across decades.

The deductible amount concept addresses a structural feature of non-account-based pensions. Many income streams pay out a mix of original capital plus earnings on that capital over the life of the pension. If Centrelink treated the entire pension payment as income, it would in effect double-count the capital contribution — dollars that were once accumulated capital would be re-characterised as new income each year. The deductible amount excludes the capital-return portion from the income test, so the pensioner's assessable income is materially lower than the gross pension payment, reducing the income-test taper and preserving more Age Pension entitlement.

The scope of income streams with a deductible amount is specific. Defined benefit pensions from Commonwealth schemes (CSS, PSS), state public service schemes, corporate DB plans and military schemes have a deductible amount. Complying lifetime pensions and term-allocated pensions, mostly closed to new entrants from 20 September 2007, have a deductible amount and are typically held by older retirees. Certain lifetime annuities and life-expectancy annuities meeting specific conditions also have a deductible amount. Account-based pensions generally do not have a deductible amount — they are assessed under deeming on the underlying balance — except for pre-1 January 2015 ABPs that the recipient has held continuously and that are grandfathered for the Age Pension income test, in which case the deductible-amount method continues to apply. (This grandfathering is different from CSHC grandfathering: CSHC grandfathered ABPs are fully exempt from the CSHC income test, while Age Pension grandfathered ABPs use the deductible-amount method — not the same thing.)

The calculation is conceptually straightforward. The annual deductible amount is the pension's purchase price divided by the relevant number, broadly the pensioner's life expectancy in years at the date the pension commenced. The purchase price for a DB pension is determined by reference to the member's contributions, employer contributions and the actuarial structure of the fund, with Centrelink applying specific rules where contributions were partial or absent. The relevant number is taken from the ATO/DSS life-expectancy tables at the date of commencement, with a longer figure used for joint-life or reversionary pensions. The annual deductible amount is then spread across the year's pension payments — if paid fortnightly, divided by 26.

The 10% cap that took effect on 1 January 2016 is the most consequential recent reform. Before then, the deductible amount under the formula could be very large for high-income DB pensioners with low contributory purchase prices — sometimes 20-40% of gross pension, materially reducing assessable income for Centrelink. From 1 January 2016 the deductible amount for non-military defined benefit pensions is capped at 10% of the gross pension payment. On a $100,000 a year DB pension, the maximum deductible amount is $10,000, regardless of what the underlying formula would produce. For most senior public servants and corporate DB pensioners, the cap is the binding constraint and the unconstrained formula figure is irrelevant.

The military exclusion is critical and is widely missed. Defined benefit pensions paid by the Defence Force Retirement and Death Benefits Scheme (DFRDB), the Military Superannuation and Benefits Scheme (MilitarySuper, MSBS) and the Defence Force Retirement Benefits Scheme (DFRB) are excluded from the 10% cap. For a military DB pensioner, the deductible amount is still calculated on the purchase-price-over-relevant-number formula and is not limited to 10% of the gross payment — the unconstrained figure applies. A retired ADF member whose DB pension would produce a 25-30% deductible amount under the formula keeps that 25-30% concession, while a retired CSS or PSS pensioner in the same circumstances is held to 10%. For advisers, the practical message is to always check the fund: if the pension is DFRDB, MilitarySuper/MSBS or DFRB, the cap doesn't apply; for almost everything else, it does.

The DB income cap is a separate, tax-only concept and is sometimes confused with the deductible amount. The DB income cap limits the 10% tax offset that ordinarily applies to DB pension income for recipients over 60 — for FY25-26 the cap is $125,000 of DB pension income, with income above the cap losing the offset and being taxed under the ordinary rules. The DB income cap is an ATO/tax concept; the deductible amount is a Centrelink/income-test concept. They have separate purposes and apply independently — and both can apply to the same person. A senior public servant with a $200,000 DB pension faces a tax outcome shaped by the $125,000 income cap and a Centrelink outcome shaped by the 10% deductible-amount cap (and, for a non-military fund, a $20,000 cap on the deductible amount).

The reversionary pension recalculation trips up many widows and widowers. When a DB pension reverts to a surviving spouse, the deductible amount may need to be recalculated. The purchase price typically does not change, but the relevant number becomes the survivor's life expectancy at the date of reversion. A spouse who is younger than the deceased generally has a longer life expectancy, producing a different annual figure than was applied to the original pension. Some schemes recalculate automatically; some don't. The point of practical advice is to verify the position with the fund and with Centrelink at the time of reversion, rather than assume the original figure carries over.

The common errors in deductible-amount assessment are surprisingly frequent: an incorrect purchase price, particularly for pre-1983 service periods where historical contribution records are unclear; the wrong relevant number, especially on joint-life or reversionary pensions; the 10% cap being applied where it shouldn't (military DB pensions), or not applied where it should; the wrong pension type identified entirely; confusion between the deductible amount (Centrelink) and tax deductions (ATO); and the reversionary recalculation simply being missed. The standing message is to verify Centrelink's deductible-amount figure independently — run the calculation, identify the right cap status, and check the result rather than accepting the assessed number on faith.

What do worked planning examples show?

These two cases show how the deductible amount works in practice. Illustrative only — not personal advice — using FY25-26 figures.

Case 1 — Robert, 70, a retired Commonwealth public servant. He receives a CSS DB pension of $85,000 a year. The pension commenced when he was 65; his life expectancy at commencement was 18 years. His contribution-based purchase price from CSS records is $230,000. On these facts, the unconstrained formula gives a deductible amount of $230,000 ÷ 18 = $12,778 a year. But CSS is a non-military DB scheme, so the 10% cap applies — the deductible amount cannot exceed 10% of the gross pension, $8,500 a year. Robert's deductible amount is therefore $8,500, and his Centrelink assessable income from the pension is $85,000 − $8,500 = $76,500. The rational steps are to verify Centrelink has applied the $8,500 figure (rather than the unconstrained $12,778, which would understate Robert's assessable income and overstate his Age Pension entitlement — eventually likely to be corrected with a debt-recovery action). If the same numbers applied to a DFRDB or MilitarySuper pension, the cap wouldn't apply and Robert would keep the $12,778 deductible amount — a real difference for the same pension on the same facts.

Case 2 — Margaret, 72, a widow. Her late husband John was a senior state public servant with a DB pension of $120,000 a year and a 60% reversionary nomination to her. John died last year; Margaret now receives 60% of his pension, which is $72,000 a year. On these facts, the deductible amount needs to be recalculated for the reversionary pension. The relevant number becomes Margaret's life expectancy at the reversion date — about 16 years at age 71. The purchase price under the scheme is, say, around $250,000, which would give an unconstrained formula figure of $250,000 ÷ 16 = $15,625. The state scheme is a non-military DB pension, so the 10% cap applies: Margaret's deductible amount is capped at 10% of $72,000 = $7,200, and her Centrelink assessable income from the pension is $72,000 − $7,200 = $64,800. (For comparison, John's pension, while it was paying $120,000 in his hands, would have been capped at $12,000.) On these facts the rational steps are to confirm the recalculation has been done at the fund and reflected in Centrelink's records, and to verify the cap is being applied to the new figure — not to the pre-reversion one. Reversionary pension recalculation is one of the most common places this gets missed.

For DB pensioners, complying-income-stream recipients and their advisers, the deductible amount is a meaningful technical feature of the Centrelink income test that should not be left entirely to automated processing. The advice work is to confirm the income stream type and whether the deductible amount applies, obtain the purchase price from the fund's records, calculate the annual figure under the formula, check the cap status — including the military exclusion — apply or omit the cap accordingly, verify Centrelink's figure, pursue correction where necessary, and reassess at reversion to a surviving spouse. The dollar value of getting this right across a long retirement can be substantial; getting it wrong can be a recurring drag on Age Pension entitlement that compounds across decades.

Sources

Key takeaways

  • Centrelink excludes a 'deductible amount' — the pension's purchase price divided by the pensioner's life expectancy at commencement — from the income test for non-account-based pensions.
  • Since 1 January 2016, the deductible amount for most defined benefit pensions is capped at 10% of the gross pension payment, whatever the underlying formula would produce.
  • Military defined benefit pensions — DFRDB, MilitarySuper (MSBS), and DFRB — are excluded from that 10% cap, so the full formula-calculated deductible amount applies.
  • The Centrelink deductible amount is a separate concept from the ATO's $125,000 defined benefit income cap, which limits the 10% tax offset — both can apply to the same pension independently.
  • When a defined benefit pension reverts to a surviving spouse, the deductible amount generally needs to be recalculated using the survivor's life expectancy at the date of reversion, which many funds and recipients miss.

Frequently asked questions

What is the Centrelink deductible amount on a defined benefit pension?

It's the portion of your defined benefit pension payment that Centrelink excludes from the income test, representing the return of your own capital contribution rather than new income. It's calculated as the pension's purchase price divided by your life expectancy at the date the pension commenced.

Is there a limit on how much of my defined benefit pension can be excluded from the Centrelink income test?

For most defined benefit schemes, yes — since 1 January 2016, the deductible amount is capped at 10% of the gross pension payment, regardless of what the underlying formula produces. This particularly affects senior public servants and corporate defined benefit pensioners with low contributory purchase prices relative to their pension.

Does the 10% deductible amount cap apply to military pensions?

No. Defined benefit pensions from DFRDB, MilitarySuper (MSBS), and DFRB are specifically excluded from the 10% cap, so the full formula-calculated deductible amount applies — which can be significantly higher than 10% for some military pensioners, giving them a genuinely different Centrelink outcome than a civilian defined benefit pensioner with the same pension amount.

Does my deductible amount change if I start receiving my late spouse's defined benefit pension?

Generally yes. When a defined benefit pension reverts to a surviving spouse, the deductible amount is usually recalculated using the survivor's life expectancy at the date of reversion, not the original figure. This recalculation is commonly missed, so it's worth confirming with the fund and Centrelink that it's actually been done.

A note on advice. This article is general information only and doesn't account for your personal circumstances. Everyone's situation is different — before acting, it's worth talking it through with a licensed adviser who knows your full picture.