Time to prepare for tougher pension income test assessments
Last week Asset Check highlighted that contributing superannuation fund members are likely to benefit from higher contributions caps in 2014-15. But changed Centrelink assessment procedures will reduce the ability of retirees who commence an age pension or start an allocated pension after January 1 next year to claim an age pension.
From that date, the Centrelink income test will assess the income from assets invested in commutable allocated or retirement income pensions under the deeming provisions currently applicable to financial assets including cash, term deposits, shares and superannuation accounts. The current maximum deeming rate is set at 3.5 per cent a year with smaller amounts subject to a lower 2 per cent a year rate.
Existing age pensioners who have started their pension income streams before January 1 next year will still be assessed under the current rules which calculate the income using the actual annual pension drawn from their account after allowing for the depletion of the original capital invested over the member's lifespan.
In practical terms, this results in the annual income assessed by Centrelink being considerably lower than the 3.5 per cent deeming rate. In many cases, the annual income subject to the income test is negligible.
Fortunately, people already receiving an age pension or shortly to be entitled to one have time to ensure that they take maximum advantage of the current assessment procedures. This can be achieved by making any changes that will improve their future position before January 1 next year.
It will be too late after that date to avoid the deeming provisions by starting a new allocated pension income
stream. At present it is possible to commute an existing pension income stream back to a lump sum superannuation account and start another pension which will still be eligible for the favourable income test assessment treatment.
After January 1 next year, all new pension accounts will be subject to the deeming provisions. This is not good news for retirees yet to reach the age pension eligibility age because even if they start a pension income stream before January 1 next year, this pension asset will be subject to deeming when they become eligible for an age pension.
There is a clear message for age pension recipients or those about to become eligible before January 1 next year. This is to put their house in order before that date by ensuring that their strategies take full advantage of the existing rules.
It is especially important to do so when application of deeming might result in the loss of all their pension entitlement, for example, when they have other income including government employee pension entitlements which will take their total income above the income test cut-off point. Losing all pension entitlement results in the loss of the pensioner benefit card.