Do you need to start your pension by the end of the year?

Key points

Income from account-based pensions will be deemed for aged pension purposes.
If you decide to refresh your pension you need to complete the paper work by 1 January 2015.
In most cases a death benefit nomination is not the equivalent of a nominated reversionary.

New Year 2015 will see two big changes made to government benefits available to retirees.

Both changes involve grandfathering, which means there is a before and after situation. The two changes are:

Aged pension – Account based pensions (ABPs) that commence after 2014 will be deemed; most pensions that commence before 2015 will retain an income test concession – this change has been legislated.
Commonwealth Seniors Health Care Card (CSHC) – ABPs that commence after 2014 will be deemed; income paid from many pensions that commence before 2015 will remain exempt from the CSHC income test – this change hasn’t been legislated.

Needless to say, there is a lot of interest in how these changes might impact a variety of situations. Most people simply want to know if they should do anything before 1 January next year.

This article will discuss the first change. We’ll look at the CSHC in a future article.

Please note – there is no change to the aged pension’s assets test (the CSHC only has an income test).

The age pension rules

Any ABP that commences next year will be deemed.

Those that commence before January next year will be grandfathered under existing rules. However, if you lose access to the aged pension after 2014 but subsequently are able to receive it again, then when you apply, your pre-2015 ABP will be subject to deeming.

The following table summarises the rule changes:

The deductible amount (DA) is calculated when your pension commenced. It’s the original purchase price divided by your actuarial life expectancy at pension commencement (or the life expectancy of your nominated reversionary if they had a longer life expectancy than you).

Current rules example

Under current rules, Centrelink (or Veteran’s Affairs if you’re a veteran) takes your pension’s purchase price (I’ll use $300,000 as an example) and divides it by your current actuarial life expectancy. Males aged 65 currently have a life expectancy of 18.54 years. Females of the same age have a 21.62 years life expectancy.

The result of this calculation is called your pension’s deductible amount or DA. In our example the DA is $16,181 if you’re male ($300,000/18.54), and $13,876 if you’re female.

The amount of income counted by Centrelink is the income paid from your pension less the DA. If your pension paid you 5% of the account balance as income, or $15,000, and you’re male you would have no income counted for Centrelink’s income test ($15,000 less $16,181). Females would have just over $1,100 counted.

For most people, as their age increases and their minimum pension increases the amount of income counted under this test also increases.

These two income amounts need to be compared to the amount of income worked out under deeming. For 2014/15 the deeming thresholds are $48,000 for a single and $79,600 for couples. Up to these thresholds you’re deemed to earn 2% each year. Above these thresholds your investments are assumed to earn 3.5% per annum.

Assume that deeming is applied to the $300,000 purchase price. This calculates to $9,780 (2.0% on $48,000 and 3.5% on $252,000),.

Clearly, this is considerably more than the current income test for pensions.

Issues for pre-2015 ABPs

Here we’ll look at two common questions.

Firstly, should I commute my existing ABP and then commence a new one to get a larger deducible amount?

You need to do some analysis of your current circumstances. Take the above pension and assume that you’re aged 70 and the ABP’s account balance is $275,000.

The male deductible amount for a new pension would be $18,631 (based on 14.76 life expectancy) and the female DA would be $15,786 (using a 17.42 life expectancy). These are slight increases on the current pension when the life expectancy for a 65 year old was used. (There are some retirees who play this game every year.)

Clearly in this example it would be better for the female to commute the pension to reduce her income counted for Centrelink purposes to zero as well.

If you believe commuting a pension and commencing a new pension (often called a “pension refresh” in the super industry) is worth your while then you’ll need everything completed before 1 January 2015 otherwise the new pension will be deemed.

Next common question – is a death benefit nomination the equivalent of a nominated reversionary? In the vast majority of cases the answer is no. You would need Centrelink and legal advice to ensure you’re on a sound footing here.

When the primary pensioner dies, the pension will remain grandfathered if it continues to be paid to the nominated reversionary if they’re also receiving Centrelink benefits. If there is no nominated reversionary, then the grandfathering rule will not apply.

If your existing pension doesn’t have a nominated reversionary, then in most cases, the best and simplest way to do this is to stop your pension and commence a new one – that is to refresh your pension, making sure your new pension has a nominated reversionary. But again, make sure you complete this task before 2015.

Don’t forget to take into account the costs of completing any transactions. Ask you SMSF administrator and other advisers for details of any additional costs.

Deeming not all bad

In many cases, deemed income will see more income counted under Centrelink’s income test than under the current rules.

But at some point, there may come a time when this situation is reversed, for example, once your ABP minimum income begins to increase significantly – say around age 80.

If you still have a grandfathered ABP, make sure, at least once a year, you review your pension to see if the old approach or the deeming approach produces the better outcome.

However, this is likely to occur later in life and is easily solved – you would simply commute your grandfathered ABP and commence a new one! That is, refresh the pension.

Major advantages of grandfathered rules

There are two:

You get the income test concession, which will probably see less super pension counted, thereby getting more government pension now
You’re not exposed to potentially higher future deeming rates (which will go up when the interest rate cycle finally turns) as your income test is based on actual income paid from the ABP less the Deductible Amount

Need to do

So if you were planning on starting a pension shortly and it looks like you will qualify in part for the aged pension – then make sure you do it prior to 1 January 2015.

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.