The Government is introducing a change in the way Centrelink will assess income on account based pensions (allocated pensions). This new law, taking effect from 1st January 2015, may impact Centrelink clients who have an existing account based pension or anyone looking to retire shortly.
Those with account based pensions commencing on or after 1 January 2015 will generally be affected by this change. However, pensions commenced before this date will continue under the current income test treatment - provided you were receiving a Centrelink/DVA income support payment at 1 January 2015 and continue to receive payments.
It’s important to understand these changes and how they will affect you. As the date of change is getting closer, we have created a breakdown of the current and upcoming account based pensions treatments for easy reference.
What is an account based pension?
An account based pension provides you with regular income for your retirement. You can choose the amount of income you wish to receive each year as long as it’s above the minimum amount determined by your age and account balance.
How are account based pensions currently treated?
The current Centrelink and Department of Veterans’ Affairs (DVA) income test only assesses annualised pension payments exceeding the deductible amount. This often results in a more favorable income test treatment, leading to higher social security payments.
What are the upcoming changes?
The income test will soon include an assumed level of income from your account based pension, based on your account balance. For many, this means their assessable income will increase, which could result in lower social security payments, and in turn, a reduced retirement income.
From 1 January 2015, account based pensions will be split into 2 different categories:
Account based pensions – new income test (deeming)
- Commenced on or after 1 January 2015; or
- Commenced prior to 1 January 2015 however one of the following applies:
- You were not receiving a Centrelink/DVA income support payment on 1 January 2015; or
- You have stopped receiving a Centrelink/DVA income support payment since 1 January 2015.
- Commenced on or after 1 January 2015 as a result of death of another person and you were not the reversionary beneficiary of the deceased.
Account based pensions – current Centrelink income test applies
- Commenced prior to 1 January 2015 and you were receiving a Centrelink/DVA income support payment on 1 January 2015 and continue to receive this payment; or
- Commenced on or after 1 January 2015 as a result of the death of another person and you were the reversionary beneficiary. When the pension reverted to you, you were receiving and continue to receive a Centrelink/ DVA income support payment.
Keep in mind, if the following changes are made to an existing pension on or after 1 January 2015, a new pension, subject to the new income test, will be established:
- Changing account based pension providers (including moving from or to a self-managed superannuation fund)
- Consolidating multiple account based pensions
- Commencing a new death benefit pension
- Adding to a pension (as the legislation prohibits the addition of capital after commencement, a recommencement will be required to top up a pension).
Will my social security benefits be impacted?
If your eligibility for benefits is based on the income test, then yes, you may be affected by this change. However, if your eligibility for benefits is determined by the assets test, you won’t be affected as the asset test treatment of an account based pension will remain the same.
Commonwealth Seniors Health Card
The Commonwealth Seniors Health Card (CSHC)
provides a range of benefits such as discounts on certain pharmaceuticals, to self-funded retirees who do not qualify for the Age Pension but have an adjusted taxable income of less than $50,000 pa for singles or $80,000 pa (combined) for couples. The upcoming changes to account based pensions may affect your eligibility for a Commonwealth Seniors Health Card, making it harder to qualify.
How do I ensure I’m in the best possible position before the change?
It’s important to ensure that your current pension suits your needs, if not, you may need to consider re-assessing your retirement strategy. If any changes need to be made, you can do so before 30 December 2014 and avoid the new law.
Some changes to consider could include:
- Changing account based pension providers
- Consolidating multiple account based pensions into one account
- Commuting and re-commencing your existing pension to lock in a higher Centrelink deductible amount
- Adding or removing a reversionary beneficiary
It is important to discuss your pension arrangements now so you have the right pension arrangements in place before the change on 1 January 2015. This could make a considerable difference to your entitlements, and due to the complexity of these changes; it’s vital to get the right advice for your circumstances.