For better or worse – what will you get from your account-based pension?

17 Oct 2014

By Phillip Gillard

Consider the following questions:

Would you retain your current Account-Based Pension for the rest of your life?

Are you aware of how changes to the Commonwealth Seniors Health Care (CSHC) card will impact you?

Do you know that new or rolled over Account- Based Pensions established after 1 January 2015 may cancel your CSHC Card?

If you're not sure of the answers to the above then it's important that you read on as you don't want to find that you're 'locked' into a fund for the rest of your life or are unable to access the benefits of having the CSHC.

The benefits of the CSHC

The CSHC provides eligible self-funded retirees with access to cheaper prescription medicines, increased benefits for certain medical expenses and a range of potential discounts from state governments and local businesses. The CSHC can save some people thousands of dollars each year however, some significant changes are about to take place and you need to understand how these changes could impact on your financial situation.

The changes and what they mean for you

The legislation, which is due to pass in the next few weeks, will result in deemed income from Account-Based Pensions being included in the definition of income. The definition of income used to determine eligibility for the CSHC is adjusted taxable income (ATI) which includes:

  • Taxable income
  • Foreign income
  • Total net investment losses
  • Employer provided benefits
  • Reportable superannuation contributions
  • Deemed income from account-based pensions from 1 January 2015 (unless grandfathering* applies)

*Grandfathering means the new deeming arrangements will not apply to existing CSHC holders who have an Account-Based Pension in place prior to 1 January 2015

The rule changes as proposed will take effect from 1 January 2015 and will effectively limit the eligibility of many seniors to access the CSHC in the future. In addition, if you change your current Account-Based Pension to a new product after 1 January 2015 you will lose access to the grandfathering arrangements and the new deeming rules will subsequently apply.

Decisions you need to be making now

You need to be considering whether you'll be financially better off by establishing an Account-Based Pension ahead of the new rule changes and, for those who already have an Account-Based Pension in place, whether this is still the most suitable one for you.

Your Account-Based Pension checklist

When reviewing whether your current fund is right for the rest of your life, you should consider the following:

How you got there in the first place – is this fund a result of your employer's selection, or did you actively and consciously make the choice?

Investment options – you want to have a wide choice so that as your circumstances change overtime you have the flexibility to adjust your investment portfolio.

Portfolio flexibility - this relates to your ability to choose which assets you draw your pension from. Many funds do not allow you to draw on one asset or one sector for withdrawals or pensions. However, it is possible to have a pension fund that allows you to specify where you draw your pension from at any time.

Costs – if you are in a typical 'balanced' fund, your pension costs should be below 1.00%pa for a $500,000 portfolio. If they are not, you should review your investment options and take action now.

Considering your options

There are many different Account-Based Pension products available in the market. The key is to make sure you're in the one that's right one for you. Given that no one can know what the perfect fund really is for the rest of their life, the next best strategy is to ensure that you are in a fund that has:

  • A wide range of investment choices
  • Portfolio flexibility
  • Good administration
  • Strong financial backing
  • Longevity
  • Appropriate pricing

The time to act is now

As 1 January 2015 is fast approaching, the time to act is now to ensure you have the necessary arrangements in place before the new changes take effect. Given the significant financial impact the new deeming rules could have make sure you seek professional financial advice sooner rather than later. A financial adviser can help you make an informed choice regarding the Account-Based Pension that's best for you and will also play an important role in ensuring that your pension retains the benefits of the grandfathering rules both now and in the years to come.

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