A pre-budget pensioner mugging

Last week was budget week. It was a noisy affair, as ambulances rushed to a budget emergency, sirens wailing, running over low-income earners, medical patients and the elderly en-route.

You probably saw that the pension age is increasing – from 67 to 70 between 2025 and 2035 – delaying access for those currently aged in their teens to mid 50s. But what you might have missed, whilst busy dodging the shrapnel flying off exploding promises, is that many people in their 60s and about to retire will lose at least some of their aged pension come 1 January next year. We're covering these changes in more detail in articles for Super Advisor members (Part 1 here) but let's take a brief look.

At the moment, superannuation isn't subject to the same 'deeming rules' that apply to financial investments like shares and term deposits. Superannuation pensions get largely ignored (due to a fixed 'deductible amount') and many people on small to medium balances collect both a super pension and the aged pension. Under new laws passed before the budget (last November), this will change, with the deductible amount going and the deeming rules extended to super accounts.

In some cases you could argue that this is the right result. If we're going to take income from elderly pensioners, and whack them $7 each time they have a prescription renewed, it's fair enough those with a reasonable super balance should also take a hit.

But this change doesn't target those with a lot of super. The 'deeming rules' – which assess you, for Centrelink purposes, as earning income based on your assets – are a function of interest rates, which are currently suppressed. If interest rates return to more 'normal' levels, someone with a super balance less than $100,000, whose retirement planning has long factored in the aged pension, could find themselves missing out on some of it under the new rules.

What should you do about this change? The important thing to note is that (for those already on the aged pension, or some other payments) the new rules will only apply to super pensions commenced, or changed, from 1 January. So if you're already taking a super pension and the aged pension, they won't affect you unless you make a switch.

Perversely, if you're on the aged pension and have a decent super balance – for instance, a couple drawing $50,000 super pension from a $1m account – the new rules are also unlikely to affect you, since you'll be assessed for the aged pension under a different test (the Assets Test).

But if you've got a smaller super account and you're about to commence a super pension, you could find yourself missing out. Some people might be better off under the new rules – for instance, those drawing down large proportions of their super balance (who'll no longer be assessed on the large amount they're spending, but the amount they're 'deemed' to earn). Most won't.

If you're close to retirement, speak to your accountant, administrator or advisor and think about starting your super pension and applying for the aged pension before the end of the year. So long as you don't change it in future, the new rules won't apply.

The practical consequence of this is that you'd better be happy with the super you've got come New Years Eve. The exemption for existing super pensions, and the inability to change your super without losing it, will effectively lock many retirees into their current superannuation provider. Happy days for the finance industry, tough luck for retirees.

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