In 2014 we saw a lot of people rushing to commence retirement income streams—you may know it as allocated pensions or account-based pensions —via their superannuation fund.
This is because the Centrelink treatment of an income stream from new superannuation allocated pensions, commenced on or after 1 January 2015, is going to be a very different.
Why you need to get it done before January 2015?
The most important condition mentioned on the Government’s Department of Human Services website indicates that for the old rules to be grandfathered and apply, the person must be in receipt of some form of Centrelink support prior to 1 January 2015.
Any existing allocated pensions, commenced prior to 1 January 2015, will retain their current income test treatment and this treatment will be grandfathered* for Centrelink recipients.
Account-based income streams held by pensioners and low income health care card holders, prior to 1 January 2015 will continue to be assessed under the existing rules unless they choose to change products or buy new products from 1 January 2015.
3 important points you need to know:
- To retain the old income treatment for the allocated pension it must have been commenced prior to 2015
- The grandfathering of the old income test treatment will only apply for recipients of Centrelink benefits, and
- Swapping from one allocated pension supplier to another will qualify as commencing a new allocated pension. If the Centrelink recipient changes allocated pension provider after 1 January 2015, then this will mean the grandfathering of the income treatment will cease: a new allocated pension will have commenced and will follow the new Income test rules.
You may be familiar with the qualification rules, Centrelink applies two tests to determine whether someone above Age Pension age is eligible for a full or part Government pension:
- An income test and
- An assets test.
Under the Centrelink Income and Asset test, whichever test produces the lowest entitlement applies. The new changes will affect the income test.
Income test changes
The changes to the income test treatment of allocated pensions could have implications for your future financial planning and perhaps even your planned retirement dates.
In the past, and before the 1 January 2015 changes come into effect, Centrelink’s income test treatment of allocated pensions was very generous. This often resulted in little, if any, of the allocated pension income being counted against the income test.
This was due to the Centrelink deductible amount, which was subtracted each year from the annualised allocated pension payments drawn down, used to determine what “Centrelink income” should be counted or assessed against the income test.
Under the current rules, the commencement value of an Allocated Pension is divided by the longest life expectancy of the owner/beneficiary. This is referred to as the Non-Assessable portion (NAP) and is not assessed as income for Centrelink purposes. Provided lump sums (commutations) are not taken, the NAP of Allocated Pension income remains non assessable for Centrelink purposes into perpetuity.
Income test example—BEFORE 1 January 2015
An example may make it clearer to understand how the Centrelink income test is applied:
|Alex is a 75-year old bachelor who commences an allocated pension on 1 July 2014:|
|Allocated Pension Opening Balance||$400,000|
|Statistical life expectancy||20 years|
|Annual allocated pension income—Legislated minimum annual pension withdrawal amount for Alex’s age, say 6% pa
(= Allocated pension opening balance x 6% = $400,000 x 6%)
(=Allocated pension opening balance / statistical life expectancy = $400,000/20)
|Assessable income under current Centrelink income test
(= Minimum annual pension withdrawal percentage – Deductible amount)
Therefore, under current rules (ie pre 1 January 2015), with the deductible amount subtracted from his total annual allocated pension withdrawals, Centrelink will assess Alex as only receiving $4,000 of income under their income test—instead of $24,000.
Deeming of pension income
However, from 1 January 2015, Centrelink’s treatment of pension income as outlined in the table above will no longer apply to new allocated pensions commenced after this date.
Instead, those new allocated pensions will be deemed like other financial investments, such as bank accounts or share investments, in order to determine what income should be counted for Centrelink’s income test purposes.
If, like Alex, you’re single and receiving a pension or allowance, the first $46,600 of your financial investments is deemed to earn income at 2% pa and any amount over that is deemed to earn income at 3.5% pa. If the actual income you receive from your investments is more than the deemed income calculated, the extra income is not counted when assessing your rate of pension, benefit or allowance.
Deeming example—AFTER 1 January 2015
|Alex is a 75-year old bachelor who commences an allocated pension on 1 July 2015:|
|Allocated Pension Opening Balance||$400,000|
|Income earned on first $46,600 of investment
(=$46,600 x 2% pa)
|Income earned on first remainder of investment
(=$400,000 – $46,600 = $353,400 x 3.5% pa
|Assessable income under new Centrelink income test deeming rules
(=$932 + $12,369
Therefore, under the incoming new income test rules, Centrelink will assess Alex as earning an annual income of $13,301. This is significantly more (a difference of $9,301) than the $4,000 in income that was assessed under the current allocated pension income test rules (as illustrated in the previous example).
Under the current rules, the vast majority of retirees are assessed under the Asset test. Post 1 January, this may no longer be the case. With NAP no longer applying to new Allocated Pensions, there will be a greater likelihood of being assessed under the Income test. Especially those who undertake part time or casual work or couples whose assets are less than $286,500 which is the point that the Asset test starts to apply.
Provided you commence your Allocated Pension before 1 January 2015, your NAP entitlements are “Grandfathered”. This means that the current rules apply. However post 1 January you will lose the “Grandfathering” if your change Allocated Pension providers, add or remove a reversionary Pensioner or cease being eligible to receive a Centrelink Benefit and then requalify.
There are no restrictions on the number of Allocated Pensions you can have. You could have an Allocated Pension with a NAP and one without. Any available assets you have in Superannuation could be moved into Allocated Pension now, and if you have planned to sell a property in 2015 you can have another pension account without NAP.
Assets test remains unchanged
The asset test treatment of allocated pensions will not change come 1 January 2015. This means that a member’s total account balance will still be counted as an asset for Age Pension purposes, just as an investment like a bank deposit would be treated.
If you’d like to learn more about how these incoming changes may affect your financial situation and plans for retirement, or about the range of financial planning services we offer please call us on 02 9955 1988.
*A grandfather clause is a provision in which an old rule continues to apply to some existing situations, while a new rule will apply to all future cases.