Q We have sold our house and I added $120,000 to my Allocated Pension which commenced in 2007 with $270,000 when I was 64 years old. If requested would Centrelink increase my exempt income allowance?
A It is a common misconception that you can “add” funds to an existing Allocated Pension. Financial Planners may refer to the process as “refreshing” an Allocated Pension. Whilst you may think you are simply contributing additional funds, there are more complicated steps involved when “adding” funds to an Allocated Pension.
In the first instance, the Allocated Pension is rolled back (commuted) into a Superannuation fund, you then make the additional Superannuation contribution. You must be eligible to make the contribution; be under age 65 or satisfy the work test of 40 hours in a continuous 30 day period prior to making the contribution and not exceed your non-concessional contribution cap. The non-concessional contributions cap is currently $180,000 a year or $540,000 over 3 years if under 65 where “bring forward provisions” are triggered. Before 1 July 2014 the bring forward Cap was $450,000 (representing 3 years’ worth of non-concessional contributions caps). Once the bring forward provisions are triggered i.e. you make a contribution above the yearly cap, the cap will apply for three tax years including the year the contribution was made so be careful i.e. once triggered the cap will not index.
The combined value of the Superannuation fund is then rolled over into a new Allocated Pension and commences as a completely new Account Based Pension. Consequently the revised commencement value of the Allocated Pension will be the commuted value of the Allocated Pension plus the contribution received. Whilst this explanation may appear pedantic, there are important reasons why I make the distinction.
Whenever you acquire or dispose of an asset, you are obliged to inform Centrelink. Likewise you need to notify Centrelink when you “refresh” your Allocated Pension. Centrelink will re-assess your entitlements on the basis of the new Allocated Pension.
The new commencement value of the Allocated Pension is divided by the longest life expectancy of the owner/reversionary beneficiary. You refer to this as your “exempt income allowance”. In Centrelink speak this is referred to as the Non-Assessable portion (NAP) and is currently 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. After 1 January 2015, if you refresh your Allocated Pension, the NAP will be lost.
For new Allocated Pensions established from 1 January, there will be no NAP. This means that all income from an Allocated Pension will be subject to Centrelink deeming rules for the Income Test when calculating entitlements to benefits. The current deeming rates are 2% on couples first $79,600 of assets and then 3.5% thereafter. No portion of the income drawn from an Allocated Pension will be exempt from assessment.
So if you wish to “add” funds or refresh your Allocated Pension, you would be wise to do so before 31 December. If investing after 1 January, you could leave your current Allocated Pension intact and establish a second Allocated Pension. One will have a NAP and the other will be deemed.