Don’t be caught out by new account based pension rules

Do you receive an income support payment from Centrelink? Then you need to know about changes that start from 1 January 2015 that have the potential to reduce your income support payments in the future.

Let’s take a look at what the changes are and who is affected.

In early April 2013 the previous Federal Government announced a number of changes to superannuation. You might have read about some of those changes, for instance there was an increase in the amount you can contribute to your super fund on a before-tax basis. But one of the other important measures announced at the same time hasn’t received as much attention.

From 1 January 2015, new account based income streams (ABPs) – which allow retirees to receive an income from their super savings – will be treated differently by Centrelink to the way they are treated today. The change was made so that ABPs would be assessed in the same way as other financial investments such as shares, term deposits or bank accounts, to improve the fairness of the age pension income test.

From that date, there will be a change to the way Centrelink assesses new ABPs (and some annuities) under its income tests. It’s important to note there is no change to superannuation rules or the way ABPs work. The change is only to social security assessment rules.

The current deeming rules

Under the current deeming provisions, financial investments are assumed to earn a certain rate of income regardless of the actual return of the investment. The deeming rates, which are how Centrelink assesses the income various investments produce, are listed below. They are applied to the total market value of all of the financial investments someone who receives Centrelink benefits owns.

Single person
Up to $48,000 - 2.0%
Over $48,000 - 3.5%

Pensioner couple (combined)
Up to $79,600 - 2.0%
Over $79,600 - 3.5%

Non-pensioner couple (each)
Up to $39,800 - 2.0%
Over $39,800 - 3.5%

The idea behind the change is to encourage individuals to choose retirement investments based on the merit of the investment, rather than for the social security benefit that may be obtained by choosing an investment product.

You could be affected if you start receiving income support payments from Centrelink from 1 January 2015 or if you start an ABP on or after this date.

What is the current treatment?

Currently, ABPs are assessed under the income test using a “deductible” amount methodology. Under these rules, the actual amount of income received is reduced by a “deductible” amount, with the net amount (if positive) being included under the income test. The deductible amount is determined by dividing the starting balance of the ABP by the recipient’s life expectancy at that time. It is possible under this formula that the deductible amount will at times exceed the actual income received, meaning no amount is assessed under the income test. Of course, the account balance is still assessable, something that’s not changing.

Who is caught by these changes?

Many people who currently have an ABP won’t be affected. But you could be affected if you start receiving income support payments from Centrelink from 1 January 2015 or if you start an ABP on or after this date.

What this means is that there is still a window of opportunity to qualify for the existing treatment. The way the rules work right now, if you qualify for the existing treatment on an ABP it will continue until the ABP ceases.

It’s important to understand that if you do already qualify for the existing treatment, you need to take care to ensure you don’t inadvertently trigger a new Centrelink treatment of the ABP in the future. There are three major scenarios that could mean an existing ABP would be assessed under the new rather than existing rules. For instance, the new rules will apply if you add new funds to an existing ABP or if you move your ABP to a new super fund provider. They will also apply if an existing recipient of an ABP dies and a beneficiary elects to continue to receive the death benefit in the form of an income stream.

In addition, it is important to think about how these changes could impact you if your Centrelink eligibility is currently assessed under the assets test. The new treatment could mean Centrelink uses the income test, rather than the assets test, to assess your eligibility, which could reduce your income support payments.

It’s essential to speak to your financial adviser if you’re worried you’ll be affected by these changes. There’s still time to take steps to reduce any negative impacts, so now’s the time to contact us to make sure you’re in the best position possible when the new rules take effect next year.

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