Starting on 1 January 2015 Centrelink will apply a different income assessment to account based pensions (sometimes also called allocated pensions). Previously the income counted for the Centrelink income test was calculated by the formula ‘Purchase Price/Life Expectancy = annual exempt income’. So an account based pension of $300,000, commenced by a person with 15 years life expectancy, resulted in the first $20,000 per annum of drawings being exempted from the Centrelink income test.
The new test will simply apply the same deeming rates that currently apply to other financial assets such as money in the bank. The ‘deeming’ test applies a notional interest rate to your financial assets in two tiers. For a couple, the first tier of $0 to $77,400 is deemed to be earning 2.00% and all financial assets above that level are deemed to be earning 3.50%. These tiers are subject to change from time to time according to the market level of interest rates.
How will the new test affect new pensions?
A person drawing down $20,000 from an account-based pension, purchased with $300,000 when they had a 15 year life expectancy, would not have any income counted for Centrelink income test purposes under the old rules. But, under the new rules $9,339 would be deemed as income. This may or may not be a big deal depending on individual circumstances. Currently it will have the biggest impact on couples with between $200,000 and $320,000 of financial assets, but that can change if the deeming rates are increased. Higher deeming rates in the future would increase the number of people that are affected. The other factor that will vary from one individual to the next is ‘other income’ from sources such as part time work or foreign pensions.
Fortunately, existing allocated and account-based pensions will be ‘grandfathered’ and kept under the old rules, as long as the investor was in receipt of either some age pension or a low income health card as at 31 December 2014.
The new higher contributions caps that take effect from 1 July provide you with the opportunity to make larger concessional contributions and non-concessional contributions.
This higher cap will help some individuals who want to withdraw from super and make a new contribution of tax free money, so that their estates may be relieved of the 15% tax on taxable super components.
The next nine months up to 31 December present a huge opportunity to revamp and refresh pensions prior to these changes. It will be important to have pensions paid from within a super fund that is very flexible and can meet your needs for a long time. Superwrap accounts and Self Managed Super Funds (SMSFs) provide the greatest flexibility and the widest range of investment options.
Another opportunity not to be missed is where your pension balance now is higher than when you first purchased it. A pension refresh can increase that Centrelink income test exempt amount, and future proof you as much as possible against the new rules proposed, and even some that we have not even contemplated yet.
Make sure that you are speaking about these issues with a your financial planner in your next meeting. Don’t leave it till mid December before thinking about what this all means. Even if you think this may not affect you, it is worth asking your financial planner whether he or she has considered this issue in your circumstances.