Age pensions and super income streams: Lifting the fog - Part 2

The rules for age pension entitlements will change on 1 January. What are they and what you should do before then?

Key Points

  • After 1 January, account-based super pensions will be ‘deemed’ for age pension
  • ‘Grandfathering’ will apply for existing super and age pension recipients
  • We highlight the strategies you should consider before then        

In account-based pensions) are treated under current age pension eligibility rules.

But, come 1 January 2015, things will change. Let’s take a look at the new rules.

The new rules

As we explained in Part 1, eligibility for the age pension and ‘deeming rules’ that apply to other financial assets, like cash and shares. Importantly, the changes won’t apply to existing pensions, including reversions, so an existing reversionary pension can pass to the nominated beneficiary without triggering the new rules (more on this later).

Account-based pensions commenced, or changed, after this calendar year will be caught. Depending on the balance of the account (and a person’s other assets) super accounts will be ‘deemed’ to have earned either 2.0% or 3.5% each year (see Table 1 for current deeming rates across all financial assets).

Amount of financial assets Deeming rate
Table 1: Current deeming rates for age pension
Single  
First $46,600 2.00%
Excess of $46,600 3.50%
Couple (where one gets age pension)  
First $77,400 2.00%
Excess of $77,400 3.50%
Source: www.humanservices.gov.au  

The potential impact can be quite dramatic. Let’s return to the Part 1 example of 65-year-old Steve, but we’ll give him a $100,000 super account to go with the $100,000 he has outside super (we’ll look at the impact on his $300,000 account below).

Under the existing rules, Steve’s super pension is ignored under the Income Test and he’s deemed to earn $2,801 on his $100,000 outside of super. But under the new rules, he’ll earn $6,301 (calculated in Table 2).

Table 2: Steve’s income under Income Test (new rules)
Account-based pension $100,000
Other financial assets $100,000
Total assets subject to ‘deeming’ $200,000
Calculation of ‘deemed income’  
First $46,600 (@ 2%) $932
Remaining $153,400 (@ 3.5%) $5,369
Total ‘deemed income’ (per annum) $6,301

Under current rules, the Assets Test is the dominant test for Steve (remember, you get the worst result of the two tests). But under the new rules, the Income Test (with deemed income on the super account now included) will become dominant, reducing his pension by $38 each fortnight (see Table 3).

Pre or post 1 Jan 15 rules? Age pension entitlement under Income Test (per fortnight) Age pension entitlement under Assets Test (per fortnight) Steve's pension (end result)
Table 3: Steve's pension entitlement under pre and post 1 Jan 2015 deeming rules
Pre 1 Jan 15 842.80* 837.93 837.93
Post 1 Jan 15 (new rules) 799.63 834.88 799.63
Note: * Maximum age pension entitlement.  

Losing $38 a fortnight, in perpetuity, gives Steve a strong incentive to remain under the existing rules. Let’s take a look at how the ‘grandfathering’ rules apply.

The grandfathering rules

To be ‘grandfathered’ (that is, to be treated under the current rules), a person must, before 1 January 2015, be in receipt of an income support payment and either an account-based pension or an annuity with greater than a five-year term. Plus, they’ve got to keep on receiving them.

The age pension is an ‘income support payment’ (as are service pensions, disability support, invalidity pensions, Newstart and Carer Payment), so if you’re in receipt of the age pension and have an account-based super pension, you’ll be grandfathered.

But if you cease your age pension, or your super pension, you’ll fail this test and move on to the new deeming rules. So it will be even more important to avoid mistakes. Failing to take the minimum pension could not only cost you the tax exemption, but age pension as well (since the super pension would be treated as having ceased).

Reversionary pensions (see Why you should take a reversionary pension) also get concessional treatment. If a member dies, and the reversionary beneficiary is receiving an income support payment, the reversionary pension will continue to be treated under the old rules.

The potential impact

The impact of the new rules depends on your circumstances, so we recommend getting personal advice if you’re uncomfortable doing the necessary calculations yourself.

Some people – particularly those making large withdrawals from super – might be better off under the new rules. The ‘deemed’ rates of income are likely to be lower than the cash payments they receive, plus (assuming they spend the money) they’re reducing the amount of the assets for the Assets Test (see Part 1). So these new rules create a perverse incentive to spend your super.

In other cases, the Assets Test would be the dominant test anyway and, whilst the Income Test result might be worse, it won’t affect the final outcome. See Table 4 for a worked example based on Steve’s financial position from Part 1.

Pre or post 1 Jan 15 rules? Age pension entitlement under Income Test (per fortnight) Age pension entitlement under Assets Test (per fortnight) Steve's pension (end result)
Table 4: Example for Steve, with $300,000 in super and $100,000 other financial assets
Pre 1 Jan 15 842.80* 537.92 537.92
Post 1 Jan 15 (new rules) 665.01 537.92 537.92
Note: * Maximum age pension entitlement.  

Retirees in this situation will be unaffected (at least at this point), but that’s largely a function of deeming rates being around historical lows.

As deeming rates rise, the Income Test will become the ‘dominant test’ for a greater number of people. Whether or not they’re actually earning income, or spending money, increased deeming rates will see more and more people have their age pension affected.

Currently, a single homeowner gets the age pension with less than $758,750 in super (assuming no other assets), but whether the Income Test applies (using the new rules) depends on the level of assets (see Chart 1).

At deeming rates of 3.5% (low rate) and 5% (high rate), with current thresholds, the Income Test will affect a much wider range of super balances (see Chart 2).

For home-owning couples the Income Test would currently be dominant (and the new rules applicable) at an asset level of $238,200 to $312,000. With ‘normal’ deeming rates this range would expand to $162,040 to $476,320.

Remember, these calculations don’t take account of other sources of income. If you’re working part time, the Income Test and the new deeming rules are likely to affect you sooner.

What should you do to minimise the impact of the changes?

Strategies

Before the new rules come into effect, you should consider the following strategies:

  1. Retiring early. If you’re planning to retire in 2015, there might be a case for accelerating your plans. But it’s highly dependent on your circumstances, since you’ll lose out on your salary (and extra super contributions) by retiring earlier. Certainly, if you’re retiring at the end of the year, it makes sense to make sure you’ve set up your age pension and super pension before then (assuming you get a better result by being grandfathered). But make sure you start the process early.
     
  2. Review current pensions and platforms. If you’re not happy with your current super pension provider look to switch it before the end of the year. One of the impacts of the new rules is that will ‘lock in’ many people to their existing super fund, since a change will cause the new deeming rules to be applied.
     
  3. Reversionary pension. Couples should consider switching to a reversionary pension, but beware of the effect on the ‘deductible amount’ (which is based on the younger person’s life expectancy). This may make you worse off in the short term.
     
  4. Review sheltering strategies. Where one partner is 65, and the other is younger, it might make sense to increase the younger partner’s accumulation account. This way the older partner has less super falling under both the Income and Assets tests. So they might get the age pension until the younger one also reaches age 65. The trade-off is having more funds in accumulation, being taxed at 15%, so this is another strategy that’s highly dependent on your circumstances.
     
  5. Apply for small Centrelink amounts. Consider applying for any amounts previously considered ‘too small’. Even if you can only get a dollar of age pension, Newstart or Carers Payment, it will qualify you for the grandfathering (assuming you also have a super pension).
     
  6. Recontribution strategies. If you’ve been considering a ‘recontribution strategy’ (withdrawing from super, and recontributing, to improve the tax-free component or optimise balances of each member) be sure to do this before 1 January 2015, so your new pension is in place.

If only one member of a couple is eligible for the grandfathering it might also be worth using a withdrawal and recontribution to maximise their (grandfathered) pension.

Remember, if in the future you’d get a better result under the new deeming rules, you’ve always got the option of ceasing the super pension and recommencing it.

Working your way through these strategies potentially requires a lot of calculations. So be sure to seek personal advice if you’re unsure of the best approach. For non-personal advice questions, use our Q&A function.

There’s likely to be a rush of activity as we approach year-end and people realise they need to act, so it’s better to get in ahead of the rush and consider your situation now.

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