Acting ahead of Account-Based Pension changes
19 Sep 2014
By Shadforth Financial Group
In previous editions of 'The Edge' we have looked at key Federal Government reforms impacting on the superannuation environment. One of these areas has been the changes to the 'Deeming of Account-Based Pensions' which will take effect from 1 January 2015. In this article we take another look at what an Account-Based Pension is, the potential impact of the Federal Government changes and what you should be doing now.
What is an Account-Based Pension?
An Account-Based Pension is an income stream paid to you from your accumulated superannuation savings and which has a market-linked component.
The current situation
Under the current rules actual income paid from your Account-Based Pension, less a pre-determined deduction based on your life expectancy, is assessed to establish the amount that is counted towards the income test.
How will the new deeming rules impact me?
The new deeming rules have been introduced to help simplify the income test assessment.
For some people this change may result in a reduction in the amount of Age Pension received, with the exception of where income drawn from an Account-Based pension is relatively high.
At present, Centrelink deem that financial investments (such as bank accounts, shares and term deposits) earn 2% per annum on the first $48,000 for singles and $79,600 for couples, and 3.5% per annum on amounts above this.
Depending on when you established your Account-Based pension will dictate whether you are assessed under the 'old' or 'new' rules. So, if you set-up your Account-Based Pension from 1 January 2015, the deeming rules will apply for the purpose of the pension income test. This is to ensure all financial investments are assessed under the same rules from 1 Jan 2015. There is no change to the assets test.
If your Account-Based Pension was established before 1 January 2015, and you are receiving an Age Pension, Disability Support Pension or other income support payment by 31 December 2014, your account based income stream will not be deemed under the income test and will continue to be assessed under the current rules.
The important point to understand is how the new rules are likely to impact you and what you could be doing now before the new rules are introduced.
What should you be doing now?
If you are currently eligible for an income support payment, you may find it is financially beneficial to establish an Account-Based Pension prior to 1 January 2015 so you are assessed under the current rules. If you wish your spouse to benefit from using the current rules after you pass away, you could nominate them as reversionary beneficiary of your pension.
If you are eligible for an Income Support payment by 31 December 2014, it may be worthwhile arranging your affairs (e.g. retiring in November rather than December) to establish an Account-Based Pension and claim the Income Support payment by then.
If you already receive an income support payment and have established an Account-Based Pension, it may be worthwhile re-commencing your Account-Based Pension prior to 1 January 2015. This may give you an entitlement to a higher Age Pension and if your spouse is nominated as a reversionary beneficiary, it may preserve the current treatment for them too.
If you do re-commence your Account-Based Pension on or after 1 January 2015 you will be assessed under the new rules which may result in a lower income support payment.
Get the advice you need
It's important you get financial advice now before the rule change comes into effect to help you make an informed decision about what is the best strategy for you to implement to help improve your overall financial position.