Deeming of Account Based Pensions
25 Mar 2014
By Shadforth Financial Group
Recently the Federal Government introduced legislation that would result in Account Based Pensions being subject to 'deeming' from 1 January 2015. This legislation has now passed Parliament. It is important to note that while the proposed legislation still awaits Royal Assent, this is generally a formality and for all intents and purposes the deeming of Account Based Pensions will take effect from the date indicated.
What is deeming?
From a social security point of view, the rate of return on certain 'financial investments' is deemed by Centrelink at set rates, regardless of what the investment actually earns. 'Financial investments' include bank accounts, term deposit, managed funds and from 1 January 2015, Account Based Pensions. Currently, the deeming rates are usually 2% per annum on the first $77,400 combined for a couple or $46,600 for a single person, and 3.5% per annum on amounts above this.
How is an Account Based Pension currently income tested?
An Account Based Pension is currently assessed on the actual income received less an amount based on the owner's life expectancy and value of account at the time of establishment. If an Account Based Pension is established prior to 1 January 2015, it will continue to be assessed in this manner where the owner is in receipt of an income support payment (such as the Age Pension, Disability Support Pension or Newstart Allowance) at 31 December 2014.
Account Based Pensions established on or after 1 January 2015, or existing Account Based Pensions where the owner is not receiving, or ceases to receive, an income support payment, will be subject to deeming.
What is the impact on those who receive an Age Pension?
Those whose Age Pension is determined via the 'income test' would generally receive a lower entitlement as a result. However there will generally be no impact on those whose pension is determined under the 'assets test'.
Should any action be taken now?
For those individuals who are receiving an income support payment, or who will start to receive one prior to the 1 January 2015, it may be worthwhile to consider commencing an Account Based Pension if their entitlement is determined under the income test. Doing so, may result in a greater entitlement.
For those receiving an income support payment, who already have an Account Based Pension, it may be worthwhile to re-start your Account Based Pension prior to 1 January 2015 as this may result in a larger deductible amount and in turn, a larger Centrelink entitlement.
Importantly, prior to taking any action you should speak to your financial adviser as what is right for you will depend on your personal circumstances.