Joe Hockey recently advised us all that the ‘Age of Entitlement’ was over and this looks to be well on track as the new rules begin to reduce the amount of millionaire pensioners claiming government assistance.
From 1 January 2015 superannuation pensions will be assessed using the deeming rules rather than the existing (and much more generous) rules that apply to superannuation pensions.
For those who have already started their superannuation pensions the income they take is generally counted towards their age pension eligibility less a deductible amount.
Often this amount covers all or almost all of the income taken from the pension thus having minimal impact on age pension eligibility.
How does ‘Deeming’ work
The income counted when working out your eligibility for the Age pension is known as deemed income.
Deemed income is when you assume a rate of return even when that rate isn’t necessarily what you actually earn. The current deeming rates are 2% up to $46,600 and 3.5% for financial investments above the lower threshold.
New rules in practice
Take a retired couple with a superannuation balance of $273,000 and no other assets.
Under the current rules they would be entitled to a full age pension under the assets test and, most likely, under the income test.
Under the new regime the super account will have been deemed to earn $10,231.50 which would reduce their eligibility for the pension by $62 per fortnight. Should the deeming rate increase as interest rates rise (this is almost inevitable) to say 6% then their age pension would reduce by a further $105 per fortnight.
This has the potential to have a massive impact on retirees and the rule changes will cause a lot of anxiety for future retirees as it will mean less pension.
Those who will be grandfathered
According to the proposed rules all pensions held by pensioners prior to 1 January 2015 will be grandfathered and continue to be assessed under the old (more Centrelink friendly) rules. To be grandfathered you must already be in receipt of an income support payment immediately prior to 1 January 2015.
Time for a Self-Managed Fund?
If ever there was a reason to consider a SMSF this would have to be it.
If you are currently invested in a retail or industry super fund pension and receiving a full or part age pension then you will be ‘trapped’ with your current product provider for life.
By settling up a SMSF pension before 1 January 2015 you will not be required to terminate your account based pension in order to change your portfolio manager or investment selection in future years.
Knight Financial Advisors Pty Ltd is a Corporate Authorised Representative of NKH Knight Holdings Pty Ltd (AFSL 438 631) ABN 30 163 152 967. The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances and objectives. We recommend you obtain professional financial advice specific to your circumstances.