From 1 January 2015, account based pension balances are to be subject to “deeming” for Age Pension purposes. This change applies from pensions commencing on or after 01/01/2015.

Importantly, existing account based pensions are to be “grandfathered” under their current treatment.

Let’s examine the implications of the reform both from a technical and strategic perspective. It is important to note, however, that the proposals have not yet become law but the changes have bipartisan agreement and have gone before the second reading of the Senate.

How are current account based pensions assessed?

At present, account-based pensions are assessed on the net income paid to the account owner, which is calculated by reducing the pension paid by an amount referred to as the “deductible amount”.

The deductible amount is calculated by dividing the balance of the account at commencement by the individual’s life expectancy and is used as a proxy for return of capital over time.

The deductible amount is unchanged throughout the life of the account-based pension unless a commutation is made at some intermediate point.

Example 1

For example, if a $500,000 account-based pension is commenced by a 65 year old woman, the deductible amount would be $23,127 (this is, $500,000 ÷ 21.62). If this person drew the minimum pension of $25,000, the net income assessed for Centrelink purposes would be $1,873 in the first year.

Should the deeming rules be legislated, an account-based pension will be deemed, its value would form part of the financial investments of the individual or couple.  The income would then be deemed under the rates in force at the time.

Based on the current deeming rates applicable to a single person, the $500,000 account-based pension would be deemed to generate income of $17,034 for Centrelink purposes regardless of the income actually drawn, assuming the individual had no other financial investments.

In this example, it can be seen that an individual commencing a pension on 31 December this year could have his or her annual age pension entitlement significantly affected as a result of increased assessable income.

An outline of proposed deeming rules

If the Senate passes the current legislation, the balance of an account-based pension will be added to other financial investments and deeming will be applied to determine total income.

However, persons may be “grandfathered” under existing rules if:
–      They are in receipt of a Centrelink/DVA income support as at 31 December 2014 and continue to receive payments,

–      The account-based pension was in place as at that date.

Pensions that start to be paid to a reversionary from 1 January 2015, will continue to be assessed under deductible rules if:
–      These rules applied to the original owner as the date of death,

–      The beneficiary was in receipt of income support when the reversion occurred,

–      The reversion was an automatic reversion

Impact of Deeming

The deeming rules once passed, will affect age pension, low income Health Cards and disability support pensions.

Currently we have very low deeming rates. The deeming rates are

2% up to $48,600 for single persons and

$77,400 for a married couple which will be deemed at 3.5%.

The deeming rules will affect people with smaller amounts in account based pensions. It will certainly hit people in the lower to middle income bracket.

 Opportunity

 To retain deductible amount rules, determine whether persons can become eligible for an income support payment (pension or allowance) before 1 January 2015.

 If yes, then before that date

–      Review income streams to ensure they are likely to remain appropriate over the long term,

–      Determine whether the pension should be restarted with an automatic reversionary nominated.

 This also applies to transition-to-retirement pensions (TTR).

Example No. 2

 Bill and Sonja are 65 and 60 years of age. Bill is retired and Sonja will work until 65. Sonja’s income is $30,000 p.a. Their assets are as follows:

 

          Bill’s Super                                                                       $500,000 

          Sonja Super                                                                      $300,000

          Joint Term deposit                                                       $100,000

          Bank account                                                                    $  50,000

          Motor vehicle & personal assets                              $  15,000

 

          TOTAL                                                                               $965,000

 Bill rolls over his super and commences an account based pension and draws the minimum pension. Under current rules Bill will receive an age pension of $8,600 p.a. This is half the standard rate as Sonja has not reached her Age Pension age. Uner the “new” proposed deeming rules Bill’s annual pension would reduce to $5,105 – a reduction of $3,575. WHY? Centrelink assessment of Tony’s account based pension would increase from $0 to $17,500.

 Couples will be most affected.

In certain circumstances the proposed deeming of account-based pensions will have a big impact on the age pension entitlement of an individual, particularly if they are in a couple situation.   

 It should also be kept in mind that some people will be better off under the proposed rules and this will particularly be the case if they draw a relatively high income from their account based pension.

As always, a person’s individual circumstances need to be considered. But it should also be noted that the impact will generally not be significant on a single pensioner.

 Don’t leave it until December 2014 to make a decision around the deeming rules affecting account based pensions. Now is the time to take action.

 

 

 

 

 

 

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David Watkins, has been providing advice to clients since 1987. He is a Certified Financial Planner, a member of the Financial Planning Association (FPA), and Superannuation Professionals Association of Australia (SPAA).Google Plus

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