From 1 January 2015 the social security deeming rules will apply to account based income streams (including Transition to Retirement pensions). This could result in a lower age pension entitlement for some individuals, depending on their circumstances.
The current treatment of account based pensions (ABPs), which uses a life expectancy formula to calculate the amount of income which is disregarded by Centrelink each year, will be ‘grandfathered’ for people who have both an existing account based pension in place and are in receipt of a social security benefit as at 31 December 2014.
That is, existing ABPs commenced prior to 1 January 2015 will continue to be treated under the existing Deductible Income Test as long as the member is in receipt of Centrelink benefits when the new rules take effect.
Unfortunately, existing ABPs may not receive grandfathered status where the member is not in receipt, or does not qualify for, Centrelink benefits prior to 1 January 2015. Grandfathering may also not apply if the ABP is commenced prior to 1 January 2015 and a benefit is not paid to the member prior to this date.
If a pre-January 15 ABP is subsequently commuted to a new provider after 1 January 2015, the grandfathered status will be lost. Automatic reversionary pensions will retain grandfathered status where the original pensioner dies after 01.01.15 and the ABP automatically reverts to the spouse.
How a person may be affected under these new rules will depend on what the deeming rates are at 1 January 2015 and beyond, and what level of assets that person holds in superannuation when commencing a new ABP. Our analysis shows a lower superannuation balance will likely result in a reduced age pension payment compared to what the member may have received under the existing Income Test.
Commonwealth Seniors Health Care Card (CSHC)
In addition to the changes noted above for Superannuaiton pensions, the Government has announced that from September 2014, the current income limits for the CSHC will be indexed annually by CPI.
Untaxed superannuation income will be included in the assessment of income to determine eligibility for the CSHC from 1 January 2015.
The assessment of superannuation income will be the same for CSHC holders as for Age Pension recipients and will align with the 2013-14 Budget measure to deem the balances of account-based superannuation of pensioners from 1 January 2015. All superannuation account-based income streams held by CSHC holders before the implementation date will be grandfathered under the existing rules. It is important that if you are nearing retirement age that you consider your plans in light of these changes.
If you or someone you know require advice in this area, please contact Morgans on 02 6686 4144.