Seven weeks left to sort out your super

There's a deadline silently sneaking up on super pensioners – one which could cost thousands annually to those who don't take action.

From next year, account-based pensions (ABPs) will be deemed for income purposes for government benefits on at least two fronts – the government age pension and the Commonwealth Seniors Health Card (CSHC). The first was announced in the 2013 budget and the second in the 2014 budget.

The deadline is December 31, which is just eight weeks away. Seven, really, if we accept that nothing except over-eating, drinking and frivolity happens from about December 24.

From next year, your super and super pension accounts will count in a way they have not previously towards these two sought-after government benefits.

Importantly, it's not too late to act. ABPs that are in place prior to January 1, 2015 will be grandfathered and will not count towards the means-testing of those two benefits. And this will be important both for those who might wish to get new ABPs in place before the deadline, but also those who might wish to adjust their ABPs to put them in a better position – or grandfather a larger pension sum – before the new laws come into force.

What happens on January 1, 2015?

When applying for the government age pension, or the CSHC, from January 1, 2015, your super and ABPs will be used to deem income under means tests. Obviously, in order to apply for the pension, you have to be 65 already.

However, under the grandfathering rules, pensions that are already in place will not be counted. (NB: Bruce Brammall amended details regarding this article on November 12, 2014.*)

Here's probably the most important part: Only pension arrangements that are in place prior to January 1 are grandfathered. If you have an existing pension and make changes to it after January 1, then that will be seen as a new pension and will be counted under the deeming rules.

Therefore, if you are considering making changes, make them before the new year, not afterwards.

Considering pension changes

Why would you want to make changes to your pension? And how could they be to your benefit?

Here are some examples. You may wish to combine existing pensions, to create reversionary pensions, or to increase pensions.

The last one is likely to be the most common. If you have a pension, but have made, or are considering making, further contributions in this financial year, consider making them all prior to December 31.

That is, if you were likely to make your $35,000 concessional contributions before June 30 next year, and then roll that into a new pension in June 2015, you should consider making those contributions early and having them wound into the pension before January 1.

It is common practice to do this every year for many clients who are continuing to work while taking the pension. That is, roll back your pension, collect the contributions you have made since you started the pension, then start a new pension.

For example, you have an existing pension of $500,000, but have made $29,750 ($35,000 less 15% contributions tax) worth of contributions so far this financial year. If you roll back your pension to collect the $29,750 after January 1, then it's a new pension and it will be deemed under the post-January 1 rules. Do it before.

And the same applies, but perhaps with bigger consequences, for those putting in non-concessional contributions, for which the limit is $180,000 a year (or $540,000 using the three-year pull forward rule). However, if you're putting in big licks of capital like this, then it's more likely that you'll be hit under the assets test in any case.

If you've already turned 65 and have been considering applying for the age pension (or have been procrastinating), then delay no longer. If you apply after January 1, or don't get around to doing your pension until after that date, then it will be too late and your super and pensions will forever be deemed assets.

And if you have considered making a change to your pension, such as adding a reversionary pensioner, then make those changes before the deadline, as they will also be considered the creation of a new pension.

What about those who are pension age, still working, but considering finishing up early in the new year? Depending on your situation, it might do you medium-term financial harm if you don't consider taking advantage of these rules and finishing up work early. If you know you are in a situation such as this, and may get the age pension, see a qualified adviser immediately. Finishing up work before Christmas could be to your benefit.

Who will be negatively affected?

The following are likely to be impacted by the changes:

• Those who are already impacted by income testing, including those with defined benefit pensions, foreign pensions and other income or wages.
• Some who are currently only asset-tested might find they become income-tested and lose some age pension also.
• Those in aged care could see a lower aged pension and higher income-tested fee.
• Those pre-retirees who are receiving the Low Income Health Card might lose their entitlement.

Who will be positively affected, or not affected?

Somewhat counterintuitively, those who take larger super pensions than the minimum could end up winners.

If you take more than the deductible amount from your super pension, then the deemed income used for the test could be less than the income being taken. That is, if you have a $500,000 pension fund, then you will be assessed on, for example, deemed income from the fund, rather than the actual income you have taken.

Those who won't be impacted are those with relatively higher super and pension balances, as they would be assessed, and possibly fail, under the assets test in any case.

And who can't benefit from acting?

If you turn 65 after the cut-off and therefore can't apply for the age pension and CSHC beforehand, then there is little you can do.

Note

Get assistance from your advisers (either financial adviser or accountant) in considering and potentially implementing these changes.

*Clarification, published November 12 in Think twice about taking a super lump sum:

Super pensions will be grandfathered from the means testing arrangements for those who are in receipt of those two government payments by 31 December, 2014. Any changes you make to those super pensions after that date will see them deemed for income purposes.

If you are applying for either of those benefits after 1 January 2014, your superannuation pensions will be deemed for income means-testing purposes.

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

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