Planning for the pension changes

There’s going to be a rush of work surrounding super pensions before the end of this year. And it will be largely about locking in access to the generous government health care card.

Planning for it is going to be critical, and those who are currently eligible are going to need to reconsider their existing strategies.

As announced in last week’s budget, access to the Commonwealth Seniors Health Card (CSHC) is to be restricted from January 1, 2015. In essence, for the first time, pension accounts will be “deemed”, which will then be counted as income when applying for the CSHC.

(This lines the CSHC with changes announced by the previous government in regards to assessing super pensions via deeming against access to the age pension from January 1, 2015. Both of these measures create needs for people eligible for either a government age pension or CSHC to consider some financial planning opportunities before the end of the year.)

The current rules state that individuals earning up to $50,000 and couples earning up to $80,000 can qualify for the CSHC, which can be worth thousands of dollars each year. The CSHC provides discounts on Pharmaceutical Benefits Scheme prescription medicines, plus potentially more extensive medical bulk billing, concessions on travel and other benefits offered by state governments.

Until January 1, 2015, the tax-free income streams from super pensions have not been included in assessments for the CSHC.

Importantly, if you turn 65 after January 1, 2017, then you’ll have to go onto the new testing and deeming limits regardless.

But if you currently receive the CSHC, or will turn 65 before December 31, then here are some strategies that you might wish to consider.

Review existing pensions

Existing cardholders will need to review their pension and income streams to consider making any changes before January 1, 2015. Those that are in place before December 31 will be grandfathered, but if you make changes to your pensions after that, or commute an income stream, you will become subject to the new deeming rules.

Do you think you will be happy to stay with your existing pension arrangements for the long term? If not, make the changes before December 31.

Moving accumulation to pension

If you have a pension in place, but have further funds in accumulation, you should consider whether you shift those accumulation funds into a pension fund this year.

Recontribution strategies

If you’re considering a recontribution strategy to improve the tax-free components for estate planning purposes, you should also make those changes this year.

The good news on the CSHC is that the income levels will be indexed, delivering on an election promise. This will allow some extra people to qualify for the card.

There were few other major surprises to come out of the federal budget in the superannuation space and have been covered previously in Eureka Report, including changes to the excess contributions tax, a further delay to the increase in the superannuation guarantee to 12% and lifting the age pension age to 70.

Planning for increase limits

While there will be some required planning for CSHC holders by the end of the calendar year, there is a far more important date that is rapidly approaching.

The end of this financial year (June 30) is far closer and requires more urgent planning, particularly when it comes to contributions.

On July 1, there are several increases occurring to both the concessional contribution (CC) and non-concessional contribution (NCC) limits.

It has been in the pipeline for some time that the $35,000 CC limit that was given to the over 60s in the current financial year has been extended to cover the over 50s from July 1.

And I covered in some detail in early March about the CPI-linked increase to the concessional contributions limit from $25,000 to $30,000 that comes in for everyone else on July 1.

NCCs are also lifting – in line with the increase in CC limits – from $150,000 to $180,000 a year. The three-year pull forward rule that applies to NCCs, therefore, also gets lifted from $450,000 to $540,000.

But an important planning note needs to be made in regards to NCC limits. The limit that you are stuck with under the pull-forward rule is determined by when you first trigger the bring-forward rule.

That is, if in this current year you contribute more than $150,000 in NCCs, then you are limited to $450,000 for FY14, FY15 and FY16.

If you don’t go over the NCC limit until after July 1, 2014 (that is, you contribute more than $180,000 in the next financial year), then you will be able to access the $540,000 NCC pull-forward limit.

So, if you were considering putting in considerable amounts of NCC money into super in the coming weeks, keep in mind whether to trigger the pull-forward rule before or after June 30.

For a broader discussion on making NCCs to super, see this article (Make the most of NCCs).

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au

• The SMSF Professionals’ Association of Australia (SPAA) has applauded the federal government’s introduction of a mechanism allowing taxpayers to withdraw excess non-concessional contributions made after July 1, 2013. “This is good news as it stops punitive tax outcomes where taxpayers can pay up to 93% on excess non-concessional contributions,” said Jordan George, a senior manager at the association.
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