What deeming changes will mean for your pension

SMSF technical expert and columnist for The Australian newspaper
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In a previous article I mentioned that from January 2015 Centrelink will deem super pensions.

This will replace the existing generous treatment, which sees pensions receive a concession based on the actual income paid, less an amount deemed to be part of the original capital you used to start the pension.

For most people, this approach means they have very little income counted for Centrelink’s income test, unless you elect to take a reasonably higher income than the minimum.

This existing treatment will continue to apply to any pensions that commence before 2015.

Deeming

On the other hand, deeming assumes your investments earn a specific rate of return.

Currently if you’re single, the first $46,600 of income is deemed to earn 2% each year. For pensioner couples, the first $77,400 is deemed to earn 2% per annum. Any assets above these limits are deemed to earn 3.5% per annum.

The Government adjusts these deemed rates of return based on prevailing market conditions. The assumed rates of return were most recently updated in early November. The thresholds are indexed each 1 July.

Typically, the deeming approach will see more income counted towards Centrelink’s income test. So what impact does this have on pensioners?

The impact

Well, overall, the income test is less severe than the assets test.

Based on my modelling, a single person who owns their own home and owns $100,000 of non-income earning assets, such as personal effects, motor vehicle etc, and no other assets except a super pension, will be impacted by this measure when the pension has an account balance of between $140,000 and $190,000. (In my modelling I’ve ignored all fees and charges as well as the pension supplement and clean energy supplement).

For home-owning couples who are in a similar position – and both eligible for the aged pension, they are impacted when their super pension has an account balance between $240,000 and $290,000.

In my modelling I have assumed the prospective Centrelink recipients took 5% of their account balance as income.

So fortunately only a very few people will be impacted by this measure. If deeming rates increased then this will have a much bigger impact of retirees.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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