Pension criteria set to change
However, a different treatment is accorded to account-based pensions. For income-test purposes, the amount that is assessed is the gross annual nominated pension payment less a deductible amount - this is calculated according to the recipient's life expectancy.
For example, if Harry, aged 65, had a superannuation balance of $300,000, and began a pension of $20,000 a year, $16,949 of the payment would be the deductible portion and would be exempt. This figure is calculated as the account balance of $300,000 divided by the life expectancy of 17.7.
This means that only $3051 would be assessed as income for the income test. The rationale is that the $16,949 is a return of capital, and therefore should not be assessed.
If the pensioner chose to take the minimum payment, which would be $15,000 a year, the deductible portion would be in excess of that amount and the entire pension would not be assessed under the income test.
The account balance from year to year is assessed under the asset test.
Last month's budget announced that from January 1, 2015, account-based pensions would also be subject to deeming and would not be assessed under the present method. Under the new rules, if Harry were single, he would be deemed to be earning $11,319 a year on his super balance of $300,000. The annual pension amount would become irrelevant.
The existing rules will remain for account-based pensions started before that date, unless the pension is commuted so as to start from January 1, 2015. This could occur if a pensioner changed income-stream providers, aggregated accounts for account-based pensions, started a new death benefit pension or added to an existing pension.
According to OnePath, the impact of these changes will depend on individual circumstances. It could include those receiving a defined-benefit pension from a government super scheme, an asset test-exempt income stream, employment or self-employment income, a foreign pension or a disability pension from the Department of Veterans' Affairs.
The changes, if applicable, will have a bigger impact on non-home owners than home owners. Also, a large number of pensioners could be affected if the deeming rates start to increase - right now the rates are low.
It's early days yet, but if the proposal becomes law, age pensioners who may be affected should take advice well before January 1, 2015.
Frequently Asked Questions about this Article…
Centrelink's deeming rules treat financial assets (like bank cash, shares and managed funds) as if they're earning a certain amount of income when assessing the age pension income test. The article notes the deeming rates in use are 2.5% and 4% depending on the level of financial assets held, and those deemed earnings are counted toward your income-test assessment.
Under the existing rules, account-based pensions are treated differently: Centrelink assesses the gross annual nominated pension payment minus a deductible amount. That deductible amount is calculated using the pension recipient's life expectancy and represents a return of capital, so it is exempt from the income test.
Yes. The article's example: Harry, aged 65, has a $300,000 super balance and draws a $20,000 a year account-based pension. The deductible portion is $16,949 (calculated as $300,000 divided by a life expectancy of 17.7), so only $3,051 of the $20,000 is assessed as income. If Harry chose the minimum payment of $15,000 a year, the deductible portion would exceed that and the entire pension would not be assessed under the income test.
The budget announced that from 1 January 2015 account-based pensions would be subject to deeming and would no longer be assessed under the current deductible/return-of-capital method. Under the proposed rules, the pension payment amount would become irrelevant and the super balance would be deemed to generate income (the article gives an example where a $300,000 balance is deemed to generate $11,319 a year).
Yes — the existing rules will remain for account-based pensions started before 1 January 2015, unless the pension is commuted so it effectively restarts from that date. Commutation can happen if a pensioner changes income-stream providers, aggregates account-based pensions, starts a new death benefit pension, or adds to an existing pension.
According to OnePath quoted in the article, the impact will depend on individual circumstances. It could affect people with defined‑benefit government pensions, asset-test-exempt income streams, employment or self‑employment income, foreign pensions, or Department of Veterans' Affairs disability pensions. The change is likely to have a bigger impact on non‑home owners than on home owners.
If deeming rates rise from their current low levels, a large number of pensioners could be affected because higher deemed income would count against the income test. The article warns that the magnitude of the impact depends on future deeming rates and individual circumstances.
The article recommends that age pensioners who may be affected seek professional advice well before 1 January 2015 so they can understand how the proposed deeming changes would affect their pension entitlements and consider options.
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