What you need to know
The Government has introduced legislation that will change the way Centrelink will be assessing income on account based pensions. This new law, taking effect from 1st January 2015, may impact Centrelink clients who have an existing account based pension or individuals who are looking to retire in the next few years.
What is an account based pension?
An account based pension (or allocated pension) can only be purchased with your superannuation money and provides you with a regular income stream for your retirement. You can choose the amount of income you wish to receive each year as long as it’s above a minimum amount based on your age and account balance. You will also have access to the capital of the pension at any time.
How account based pensions are currently treated
Under the Centrelink and Department of Veteran’s Affairs (DVA) income test, only annualised pension payments exceeding the deductible amount are assessable. The current treatment often results in more favourable income test treatment compared to other finance investments, which can lead to higher social security payments.
What are the changes?
From 1 January 2015, the income test rules for account based pensions will change so that account based pensions will be assessed in the same way as other financial investments. The income test will include an assumed level of income from your account based pension, based on your account balance.
For many individuals, this means their assessable income will increase, which may result in lower social security payments – reducing their retirement income.
The changes will generally only affect account based pensions started on or after 1 January 2015. Pensions commenced before this date will continue to retain the current income test treatment provided you were receiving a Centrelink/DVA income support payment at 1 January 2015 and continue to receive payments.
How will account based pensions be treated after 1 January 2015?
From 1 January 2015, account based pensions will be categorised into 2 different categories:
Account based pensions – new Centrelink income test (deeming)
- Commenced on or after 1 January 2015; or
- Commenced prior to 1 January 2015 however one of the following applies:
- you were not in receipt of a Centrelink/DVA income support payment on 1 January 2015; or
- you have ceased to receive a Centrelink/DVA income support payment since 1 January 2015.
- Commenced on or after 1 January 2015 as a result of death of another person and you were not the reversionary beneficiary of the deceased.
Account based pensions – current Centrelink income test applies
- Commenced prior to 1 January 2015 and you were in receipt of a Centrelink/DVA income support payment on 1 January 2015 and continue to receive payment, or
- Commenced on or after 1 January 2015 as a result of the death of another person and you were the reversionary beneficiary and, when the pension reverted to you, you were and continue to be in receipt of a Centrelink/DVA income support payment.
As previously stated, any new pensions commenced on or after 1 January 2015 will be assessed under the new deeming rules. Furthermore, if the following changes are made to an existing pension on or after 1 January 2015, a new pension will be established and will be subject to the new income test:
- Changing account based pension providers (including moving from or to a self-managed superannuation fund)
- Consolidating multiple account based pensions
- Commencing a new death benefit pension
- Adding to a pension (as the legislation prohibits the addition of capital after commencement, a recommencement will be required to top up a pension).
Will my social security benefits be impacted?
If your eligibility for benefits is based on the income test, you may be affected by this change. You may be income tested if you have financial investments between certain thresholds or other sources of income such as salary or wages, taxable defined benefit pensions or foreign pensions.
However, these changes won’t affect you if your eligibility for benefits is based on the assets test, rather than the income test because the asset test treatment of an account based pension isn’t changing.
What can I do to position myself in the best possible way before the change?
Before the changes come into effect, it’s important to confirm that your current account based pension suits your needs and you should consider re-assessing your retirement strategy.
If you need to make a change, you can do so before 30 December 2014 and avoid the new law affecting your entitlements.
Here are some of the changes you may want to consider before 1 January 2015:
- Changing account based pension providers
- Consolidating multiple account based pensions into one account
- Commuting and re-commencing your existing pension to lock in a high Centrelink deductible amount
- Adding or removing a reversionary beneficiary (a person who will receive your pension if you die).
Commonwealth Seniors Health Card
The Commonwealth Seniors Health Card (CSHC) provides a range of benefits, such as discounts on certain pharmaceuticals, to self-funded retirees who do not quality for the Age Pension but have an adjusted taxable income of less than $50,000 pa for singles or $80,000 pa (combined) for couples. The Government has proposed that from 1 January 2015 there will be further changes to account based pensions that may affect your eligibility to your CSHC, making it harder to qualify.
Why financial advice is important
It is important for us to discuss your pension arrangement now, as putting the right pension arrangements in place before 1 January 2015 could make a considerable difference to your entitlements.
Speak to us for more information.