Q I have been told it is really important to establish an Allocated Pension before 1 January 2015. I am 65 and married, I was wanting to hold out a little longer as I have a property I want to sell and then invest the proceeds into Superannuation. I was hoping to leave it until July 2015 as I plan to retire in June. Should I establish an Allocated Pension before January or wait? I expect to receive a small Age Pension.
A The conventional pre-retirement planning strategy would have been consolidate your assets into Superannuation and then establish an Allocated Pension. The timing of the sale of the investment property to minimise the impact of Capital Gains tax is appropriate whilst being careful to manage the after tax Superannuation Contribution Caps. This could enable you to contribute $180,000 into Super this Financial Year and then subject to the work test $180,000 after 1 July 2015 from the sale of the investment property prior to turning 65.
The “Fly in the ointment” is the change in the Centrelink treatment of new Account based Pensions (Allocated Pensions) from 1 January 2015.
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.
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.
Under the Centrelink Income and Asset test, whichever test produces the lowest entitlement applies. 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. If the tax consequences of selling the property now outweigh the future loss of Centrelink benefits, then wait until the new Financial Year to establish another Allocated Pension from the sale of the property.
Be aware of the consequences of the changes. All retirees and pre-retirees should review the status of their Allocated Pensions to ensure they are structured appropriately. Things to consider could be; adding additional funds to Superannuation and “refreshing” the Allocated Pension, consolidating existing Allocated Pensions, reviewing the existing Allocated Pension provider, and reviewing existing reversionary Pension nominations.
Be careful, there may be unintended consequences of moving to an Allocated Pension too early. For example a spouse’s Superannuation assets are not counted for Asset test purposes if the spouse is under Age Pension Age. However the assets are counted if the funds are moved to an Allocated Pension!
Whilst these changes only impact those who are eligible to receive specified Centrelink income support benefits now and into the future, the complexity is in understanding which test applies and at what asset and income level. The cumulative results in the reduction in Age Pension benefits can be substantial if considered in the long term. Get professional advice either to understand the future impact or to confirm you understand the consequences.