The former Labor Federal Government announced a raft of budget changes on 5 April 2013, including a proposed deeming rule changes to Account Based Pensions. These changes to the deeming provisions will align income streams with other financial assets when an individual is assessed for Centrelink/DVA entitlements. The Coalition Government decided to proceed with these new measure and is expected to become law and take effect from 1 January 2015.
How does this currently work?
Retirees eligible for Centrelink/DVA entitlements have deeming rates applied to the total market value of their financial investments. That is, financial investments are assumed to be earning a certain rate of income, regardless of what they actually earn. The objective of this Government policy is to encourage people to choose investments on merit, rather than on the effect that the level of investment income may have on their income support entitlement.
Different rules currently apply for assessing income to certain income streams with Centrelink and Veteran’s Affairs which are not subject to income deeming and also benefit from a deductible amount calculated using an individual’s life expectancy.
Proposed changes from 1 January 2015
The Social Services and Other Legislation Amendment Bill 2013 will extend the income deeming provisions to any asset-tested income stream that is an account-based pension, or an equivalent annuity product. This new measure ensures that people with similar financial assets are treated consistently under the income support system.
The amendments once they receive Royal Assent will commence on 1 January 2015.
Grandfathering existing income streams
Account-based income streams held by income support recipients immediately before 1 January 2015 will continue to be assessed under the existing rules unless recipients choose to change to a product that is assessed under the new rules.
Therefore, to qualify under the grandfathering rules, the following criteria must be met:
- the person was receiving an income support payment immediately before 1 January 2015;
- either of the following was being provided to the person immediately before 1 January 2015:
- an asset-tested income stream (long-term) that is an account-based pension; or
- an asset-tested income stream (long-term), that is an annuity provided under a contract that meets the standards determined in an instrument under subparagraph 1099DAA(1)(b)(ii) of the Social Security Act;
- the person has been continuously receiving an income support payment since 1 January 2015; and
- that income stream has continued to be provided to the person since 1 January 2015.
The person referred to above is the primary beneficiary (i.e. pensioner).
It is important to note that individuals will not be able to simply commence an income stream (e.g. transition to retirement income stream) prior to 1 January 2015 to have the grandfathering rules apply.
If the pension ceases
If a person’s income support payment ceases to be payable and is subsequently recommenced, that person will be subject to the new deeming rules from the day that the income support payment ceases to be payable.
A pension may cease in several ways that could impact an income support payment including:
- Failure to comply within the pension rules (e.g. not taking the minimum pension)
- Full commutation of an income stream; and
- Death of a member
What about reversionary income streams?
Where an individual is already in receipt of an account-based pension, these amendments do not apply to a reversionary beneficiary if the following criteria are met:
- the primary beneficiary died during a time while the amendments were being made having satisfied the grandfathering provisions;
- the qualifying income stream (grandfathered) reverts to the reversionary beneficiary on the primary beneficiary’s death;
- at the time of that reversion, the reversionary beneficiary is receiving an income support payment;
- the reversionary beneficiary has been continuously receiving an income support payment since the time of that reversion; and
- that income stream has been provided to the reversionary beneficiary since the time of that reversion.
Henry decides to commence a pension with his $350,000 account balance within his SMSF on his 65th birthday. Under the current rules, Henry would be entitled to a deductible amount (DA) of $18,878 against the level of pension withdrawn, meaning he could withdraw 5.4% of his balance (minimum pension of 5%) without any of the pension counting under the income test. The DA is calculated as $350,000 / 18.54 years, using the 2005-07 male life expectancy tables. By comparison, if Henry started an account based pension under the new rules from 1 January 2015, the pension will now be deemed at 3.5%, meaning an amount of $12,250 will now be assessed under the income test.
Note that from 4 November 2013, the deeming rate has decreased:
|Deeming rate – 2%||
$0 – $46,600
$0 – $77,400
|Deeming rate – 3.5%||
It is important that individuals and couples currently receiving an age pension give appropriate consideration to the impact of these changes and analyse their options in the lead up to 2015.