That’s because tax-free income from account-based super pensions will soon be included in the income test for Centrelink purposes and to the Commonwealth Seniors Health Card income test. This will put income from super pensions on a level footing with income earned on investments outside super.
The good news is that you have until January 1, 2015 to prepare. Even then, if you are already in receipt of a pension, the new rules will only affect retirees with super pensions started on or after that date.
How does deeming work?
To be eligible for a full or part age pension you need to pass both an assets test and an income test. Under the income test, your financial assets are ‘deemed’ to have earned a set amount of income, regardless of how much they actually earn.
The current deeming rates for a single retiree are 2 per cent for the first $48,000 of a pension account balance and 3.5 per cent for the remainder. For couples the threshold amount is $79,600.i
The new rules will have the greatest impact on retirees with more modest super balances, where the income test is used to determine how much age pension they receive. That is, single home-owners with assets of less than $135,850 or couples with less than $238,200.ii
From 20 September 2017, the deeming thresholds for means-tested payments are set to be lowered to $30,000 income for singles and $50,000 for couples.iii This will make it even harder to qualify for a full or part pension under the income test.
A card with benefits
If you do not receive any Age pension, you may still be entitled to the Commonwealth Seniors Health Card. It provides access to benefits including pharmaceutical discounts and certain travel concessions.
There is no asset test to qualify for the health card but there is an income test, currently $50,000 for singles and $80,000 for couples.iv Currently, tax-free income streams from super pensions are not included in the income test but that will change on January 1.
Who is affected?
The new rules ensure that anyone who already has a super pension in place and either receives the Age pension (or other specified Government income support payment) or the Commonwealth Seniors Health Card will not be affected. That is, they will continue to be assessed under the current rules.
If you turn 65 on or after that date you will be assessed under the new rules. Similarly, if you are already in receipt of a pension (or other specified Government income support payment), but commence your super pension on or after 1 January, you will be assessed under the new rules.
While existing pension and card entitlements will continue as normal come January 1, they could still be jeopardised if you breach the new rules.
For example, if a super pension is stopped and re-started, the new pension will be assessed under the less generous deeming rate system. This could happen if you fail to pay the minimum pension amount for the year or if you put extra money into your pension, technically re-starting it in the process.
Your estate plan may also need reviewing. For example, you may need to take steps before January 1 to ensure your partner continues to receive a part pension or the health card after your death. This is what is called a ‘reversionary’ pension because it ‘reverts’ to your beneficiary upon your death.
In light of these changes, if you still have money in an accumulation fund you might consider moving it into a pension.
There’s still time to plan, speak to your financial adviser to discuss your retirement income strategy.
i. Australian Government, Dept of Human Services, http://www.humanservices.gov.au/customer/enablers/deeming
ii. ‘Guide to keeping your old benefits’ by John Wasiliev, Australian Financial Review 21-22 June 2014, page 26.
iii. ‘Planning for the pension changes’ by Bruce Brammell, Eureka Report 19 May 2014
iv. As above