Pension criteria set to change
Centrelink uses the deeming rules when assessing eligibility for the age pension under the income test. This means assets such as cash in the bank, shares and managed funds are deemed to be earning a certain income. The rates used now are 2.5 per cent and 4 per cent, depending on the amount of financial assets held.
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.