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Inheritance and Windfalls: How a Lump Sum Affects Your Age Pension
An inheritance, redundancy payout, prize win, or insurance settlement can feel like a blessing — until you start worrying about what it'll do to your Age Pension. Here's the reassuring news: receiving the money is straightforward to handle. The trickier part is what you do with it next. This guide walks through both.
What counts as an inheritance or windfall?
For Centrelink purposes, an inheritance or windfall is any lump sum that increases your assets. The source doesn't change how Centrelink treats it — what matters is the dollar amount and what you do with it. Common examples:
- Money or property from a deceased estate
- Lottery or gambling wins
- Insurance payouts (life, trauma, total and permanent disability)
- Redundancy or employment termination payments
- Court settlements or compensation
- Money or assets received as a gift from family
- Proceeds from selling personal items of significant value (an unexpected sale of art, antiques, collectibles)
✓ Receiving an inheritance is NOT a gift
Centrelink's gifting rules apply to people who give assets away, not to people who receive them. When you inherit, that money is simply added to your assessable assets from the date you receive it. No "deprivation" applies to you.
But: the moment you pass any of the inheritance on to your children, grandchildren, friends, or charity, those onward transfers ARE gifts — and the gifting rules apply in full. This is the most common misunderstanding people have about inheritances.
Your obligation to report
You must tell Centrelink about any inheritance or windfall within 14 days of receiving it. This isn't optional. Failing to report can result in an overpayment, which Centrelink will recover — sometimes with penalties on top.
⚠️ "I haven't received it yet" is not a free pass
An inheritance isn't assessed until you actually receive it. If you're a beneficiary of an estate that's still being administered, you don't need to report it until the executor distributes your share. But once distribution happens — whether as cash, property, or other assets — the 14-day clock starts. Estates typically take 6 to 12 months to administer; complicated ones can take years.
How to report
You can report changes to your assets through your Centrelink online account via myGov, by calling the Older Australians line on 132 300, or by visiting a Services Australia service centre in person. When reporting, you'll need to tell them:
- The amount received
- The date you received it
- The source (estate, lottery, insurance, settlement, etc.)
- Where the money is now (bank account, invested, spent on an asset)
How an inheritance affects your pension
An inheritance affects your pension through both the assets test and the income test, and both are reassessed when you report the change.
The assets test impact
The lump sum increases your total assessable assets. As a homeowner, your assets are tested against thresholds starting at — (single) or — (couple). Assets above the relevant threshold progressively reduce your pension by $3 a fortnight for every $1,000 over the threshold. Push past the cut-off entirely and your pension stops. See our assets test guide for the current cut-off amounts.
The income test impact (deeming)
If the inheritance goes into a bank account, term deposit, or financial investment, Centrelink deems income on the higher balance. Financial assets below — (single) or — (couple) are deemed at the lower rate of —; amounts above that are deemed at —. The actual return on the money doesn't matter — only the deemed amount.
ℹ️ Centrelink pays whichever test gives the lower result
Your pension is recalculated under both tests; whichever produces the lower payment wins. For most pensioners, the assets test is the binding constraint when a large lump sum lands.
🧮 Example: Margaret inherits $150,000
Margaret is a single homeowner receiving a part Age Pension. She has $280,000 in existing financial assets. She inherits $150,000 from her mother's estate and deposits it in her bank account.
Before inheritance: $280,000 in financial assets
After inheritance: $430,000 in financial assets
Both her assets test and income test are reassessed at the higher balance. Her pension will reduce — and depending on her total assets, it could be cancelled entirely. If it's cancelled, she can re-apply once her assessable assets drop back below the cut-off.
What if you spend the inheritance?
What you do with the money matters enormously for Centrelink. Different uses have very different consequences:
| What you do with it | Centrelink treatment |
|---|---|
| Keep it in cash or bank accounts | Counted as a financial asset; subject to both the assets test and deeming. |
| Invest it (shares, managed funds, term deposits) | Counted as a financial asset; subject to both tests. |
| Pay off your mortgage (if you're a homeowner) | Reduces assessable assets. The mortgage wasn't counted but the cash was; paying it off removes the cash from assessment. |
| Renovate your home | Reduces assessable assets. Your home is exempt from the assets test, so money spent improving it leaves the assessment entirely. |
| Buy a car or personal items | The car or items become assessable at their current market value — usually less than what you paid, so this partially reduces your assessment. |
| Contribute to super | Still an assessable asset (super is counted from Age Pension age) but may have tax benefits. See super contributions. |
| Give it away to family | Subject to gifting rules. Up to $10,000 per financial year and $30,000 over 5 years is fine. Excess becomes a deprived asset for 5 years. See gifting rules. |
| Pay for a holiday or living expenses | Reduces assessable assets once spent — genuine personal consumption is not gifting. |
| Prepay funeral expenses | Exempt up to the prescribed limits if held in an approved funeral bond or prepaid funeral plan. |
💡 Your home is your best assets-test friend
Your principal home is exempt from the assets test. Spending an inheritance on your home — paying off the mortgage, renovating, or making accessibility modifications — effectively removes that money from your assessable assets, while leaving you with an improved home. Just don't spend wastefully; the goal is to better your living situation, not to "hide" assets.
The gifting trap: don't give it away too quickly
This is where people get hurt. Receiving an inheritance is not a gift. But sharing some of it with family — to help with a deposit, repay a child's debts, contribute to a wedding — IS a gift, and the gifting rules apply to those onward transfers.
You can give up to $10,000 per financial year, with a maximum of $30,000 over a rolling 5-year period, without it affecting your pension. Above those limits, the excess becomes a "deprived asset" — Centrelink keeps counting it under both tests for 5 years, even though you no longer have the money.
🚫 Example: Brian gives $100,000 to his son
Brian inherits $200,000 and immediately gives $100,000 to his son for a house deposit. After the $10,000 annual gifting allowance, $90,000 is treated as a deprived asset.
Want to understand exactly what counts as gifting?
Our Is This a Gift? page works through dozens of real-world examples — paying for a family holiday, donating to charity, forgiving a loan, school fees, and more.
Inheriting property instead of cash
If you inherit a house, investment property, or share portfolio instead of cash, things are more complicated. The inherited asset is assessed at its current market value from the date you receive it — not what the deceased originally paid for it.
An inherited investment property counts as a non-financial asset in the assets test, and the net rental income (rent minus expenses) counts under the income test. If you inherit a property you don't plan to live in, you have three main options, each with different consequences:
- Keep it and rent it out — adds to your assessable assets at market value and adds rental income (less expenses) to your income test
- Sell it — converts the asset to cash, which is then deemed under the income test
- Move into it — it becomes your exempt principal home, but you may become a non-homeowner at your current address (changing your assets test thresholds)
Property inheritances often involve significant decisions about capital gains tax timing, stamp duty exemptions, and family arrangements between siblings. This is exactly the situation where professional advice pays for itself many times over.
Strategies worth considering
There's no one-size-fits-all approach to managing the pension impact of an inheritance, but here are strategies that may help. Get professional advice before acting on any of these — what works for one person may not work for another.
- Pay down debt on your home — removes the cash from assessable assets while reducing your mortgage
- Renovate or improve your home — same principle, with the bonus of an improved living environment
- Replace ageing personal assets — a new car, fridge, or other genuinely-needed item is consumption, not gifting, and the new item is worth less than the cash you paid for it
- Prepay legitimate living expenses — genuinely spending money on yourself is not gifting
- Consider super contributions — may not reduce assets-test impact but can deliver tax benefits; downsizer contributions and non-concessional contributions are worth exploring
- If you're in a mixed-age couple, consider transferring to a younger spouse's super — Centrelink treats spouse-to-spouse transfers as movements within a single financial unit, not as gifts. If one partner is under Age Pension age, moving inheritance funds to their accumulation-phase super removes that money from the assets test entirely. See our Mixed-Age Couple Calculator to model the impact
- Invest in funeral bonds — exempt up to the prescribed threshold
- Take a meaningful holiday — genuinely consuming money reduces assessable assets
- Spread any gifting over multiple years — staying within the annual and 5-year limits avoids the deprivation trap
- Get professional advice before acting — a planner can model the pension impact of different strategies before you commit
ℹ️ Timing matters — especially for expected inheritances
If you know an inheritance is coming — for example, a parent is in aged care and you're a named beneficiary — it's worth getting advice before the estate is distributed. A planner can model different scenarios so you're ready to act strategically the moment the money lands, rather than scrambling reactively after the 14-day clock starts.
Frequently asked questions
Yes. You must report any inheritance or windfall to Centrelink within 14 days of receiving it. You don't need to report it while the estate is still being administered — only once the executor distributes the funds or assets to you. Failing to report can result in an overpayment debt with penalties.
No. Receiving an inheritance is not a gift — gifting rules apply to people who give assets away, not people who receive them. The inheritance is simply added to your assessable assets from the date you receive it. However, if you later pass any of the inheritance on to family, those onward transfers ARE gifts and subject to the gifting rules.
It may reduce or stop entirely, depending on the size of the inheritance and your other assets. Centrelink reassesses your pension using both the assets test and the income test at the higher balance. If your total assessable assets push past the relevant cut-off threshold, your pension can be cancelled. It can be restarted later if your assessable assets fall back below the threshold (for example, after you spend down the inheritance on legitimate purchases).
You can, but the gifting rules apply. You can gift up to $10,000 per financial year and a maximum of $30,000 over five years without it affecting your pension. Anything above those limits is treated as a deprived asset for 5 years — meaning the gift continues to count against you under both tests, even though you no longer have the money.
An inheritance is not assessed until you actually receive it. If you're a beneficiary of a deceased estate that's still being administered, you don't need to report it until the executor distributes your share. Once distribution happens, you have 14 days to report. Estates often take 6 to 12 months to administer, sometimes longer if the estate is complex or contested.
Yes — different uses have very different effects. Money kept in a bank account or invested is fully assessed under both tests. Money spent on your principal home (renovations, mortgage paydown) is removed from the assets test because your home is exempt. Money you genuinely consume (holidays, living expenses, replacing your car) reduces your assessable assets once spent. Money given to family is treated as a gift, subject to the gifting limits.
What to do next
Receiving an inheritance is rarely simple emotionally, and it's not always simple financially either. The 14-day reporting clock starts the day you receive it, but the bigger decisions — what to do with the money to manage the pension impact, whether to share some with family, how to handle inherited property — deserve more thought than that. A short conversation with someone who knows the rules can save you significant pension over the years ahead.
Received a lump sum? Get the strategy right.
How you handle an inheritance in the first few months can affect your pension for years. Don't guess — get expert input before you commit.
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Disclaimer: The information on this page is general in nature only and does not take into account your individual circumstances. It is not financial advice, tax advice, or legal advice. Inheritances and windfalls can involve complex tax, estate, and Centrelink interactions. Before making any decision about how to handle a lump sum, consult a qualified financial planner, accountant, or solicitor.
Primary sources: Services Australia — Changes you must tell us about · Services Australia — Assets test · Services Australia — Gifting
Page last reviewed by Mary at RetirementCalculators.com.au