Two of the more significant changes for retirees that was proposed in the government’s 2014 budget are changes to age pension and seniors health card entitlements.
From January 1 2015 there will be different method of assessing the income tests for these highly regarded government benefits by retirees, creating a window of planning opportunity for those who may be most impacted to lock in their entitlements under the current rules.
The Changes – A recap
Deeming of Superannuation Pensions for Age Pension Income Test
The Government proposed in the 2013-14 Federal Budget extending to account-based income streams the Centrelink deeming rules that currently apply to financial investments such as bank deposits, shares and managed funds.
Currently, the first $46,600 for a single pensioner and $77,400 for a pensioner couple of financial investments is deemed at 2.5 per cent per annum. Any financial investments over these thresholds are deemed at 4 per cent per annum.
This is to apply to account based pensions that commence on or after 1 January 2015. All products held by pensioners before 1 January 2015 will be grandfathered indefinitely and continue to be assessed under the existing rules unless they choose to change products. The existing rules allow for a ‘deductible amount’ which is calculated by dividing the pensioners life expectancy by the purchase price of these pension. The pensioner can then make superannuation pension withdrawals up to this amount annually without having any payments assessed for the income test.
As an example, if a single 65-year-old started a pension from a super balance of $200,000, the 5 per cent minimum pension would require taking at least a $10,000 pension annually. Their 18.54 years life expectancy (divided into the $200,000) would entitle them to treat $10,790 as a deductible amount so none of the pension would be assessed for the income test.
Commonwealth Seniors Health Card
From 1 January 2015 the Government will commence including untaxed superannuation income in the assessment of income to determine eligibility for the Commonwealth Seniors Health Card (CSHC). The health card test presently allows a single self-funded retire to earn $50,000 a year and a couple $80,000 and receive the card with its medical and pharmaceutical concessions.
The assessment of superannuation income will be the same for CSHC holders as for Age Pension recipients and will align with the 2013-14 Budget measure to deem the balances of account-based superannuation of pensioners from 1 January 2015. All superannuation account-based income streams held by CSHC holders before the implementation date will be grandfathered under the existing rules.
Assess your options
Each person or couples financial position is very different, and the proposed law change adds a further layer of complexity that means the ideal outcome or strategy can vary from one person to the next. It may be beneficial for many to ‘lock in’ their pensions before 1 January 2015 to ensure their treatment is grandfathered through under current rules.
What is significant about any strategy that could affect an entitlement to the health card or Age Pension, is that if deeming applies and the interest rates that apply to deeming rise, then the level of income assessed under the test will increase – leading to a possibility of the test being failed and the card being lost or Pension benefits being reduced.
Be careful of the traps
Whilst it may be best to ‘lock in’ the treatment of future superannuation benefits under the current rules, it is also important to look at the conditions which would trigger the new rules to apply.
For seniors health card holders, for example, anyone with a superannuation pension will need to take care after January 1 2015 when considering travelling overseas for more than six weeks or when reorganising their pension. That’s because these are events that could cause the proposed grandfathered treatment of their pension to cease.
Lump sum withdrawals from super after January 1 2015 are also an important area of consideration. This could result in the loss of the grandfathering entitlement that allows the current more concessional treatment of super pension income to continue beyond January.
A lump sum withdrawal could result in a ‘fund restructure’, because it will require a recalculation of the income-deductible amount (explained earlier) that reduces any super pension income under the age pension income test. This is fine before January 1 but a deeming change trap after this date.
If, on the other hand, extra income is taken in pension form rather than a lump sum, while it won’t require a deductible amount recalculation and restructure that will result in the deeming rules beginning to apply, there will be extra income above the deductible amount that must be taken into account when assessing an age pension entitlement and/or seniors health care card holders.
Conclusion
While it is still early days and the legislation that will introduce the changes to the health card is still to come, the replacement of the current rules could mean someone with a super pension assessed under the current rules could be significantly better off.
For seniors health card holders, for example, anyone with a superannuation pension will need to take care after January 1 when considering travelling overseas for more than six weeks or when reorganising their pension, says Dixon Advisory technical manager Tina Wilson. That’s because these are events that could cause the proposed grandfathered treatment of their pension to cease.
It could mean that instead of their super pensions not being counted as income under the health card income test (as is the case at present), the deeming rules would apply. This will involve putting an income value on the pension account balances that will need to be added to other income counted in the test. The health card test presently allows a single self-funded retire to earn $50,000 a year and a couple $80,000 and receive the card with its medical and pharmaceutical concessions.
Based on current deeming rates that apply an income value of 2 per cent on the first $46,600 of a single retiree’s pension account balance and 3.5 per cent in the remainder, a single person will be able to hold $1.4 million in super pensions and still be under the $50,000 income threshold (which from September will be further enhanced by being increased by the rate of inflation over the previous year).
The deeming rate for a couple of 2 per cent on the first $77,400 of pension assets and 3.5 per cent on the balance allows $2.3 million of assessed pensions to still be under the $80,000 income threshold.
These two respective income thresholds could be around $51,500 (singles) and $82,000 (couples) after being adjusted for inflation in September.
What is significant about any strategy that could affect an entitlement to the health card, says Wilson, is that if deeming applies and the interest rates that apply to deeming rise, then the level of income assessed under the test will increase – leading to a possibility of the test being failed and the card being lost.
While it is still early days and the legislation that will introduce the changes to the health card is still to come, the replacement of the current rules could mean someone with a super pension assessed under the current rules is 10 per cent better off.
An incentive to deal with it
There is, therefore, an incentive to deal with any pension restructuring before January.
While it is possible to increase a pension payment without restructuring a fund, says AMP SMSF technical manager Philip LaGreca, it may be a different story if a formal lump sum withdrawal is made after January 1. This could result in the loss of the grandfathering entitlement that allows the current more concessional treatment of super pension income to continue beyond January.
Why a lump sum withdrawal could result in a fund restructure, explains LaGreca, is because it will require a recalculation of the income-deductible amount that reduces any super pension income under the age pension income test. This is fine before January 1 but a deeming change trap after this date.
Under the present age pension income test, the original account balance of an account-based pension is divided by the life expectancy of the retiree at commencement and this becomes a deductible amount that reduces pension income under the test. If a lump sum is taken from the super (a strategy described as a commutation), the deductible method rules require this to be subtracted from the original pension starting balance and a new deductible amount calculated using the same life expectancy as the original pension.
As a result, there will be a lower deductible amount which could result in more of the pension being assessed as income depending on how much is withdrawn.
Under super rules there is a compulsory minimum pension that must be taken each year based on the account balance and a member’s age. The minimum for someone aged between 65 and 74 is 5 per cent of the balance.
As an example, if a single 65-year-old started a pension from a super balance of $200,000, the 5 per cent minimum pension would require taking at least a $10,000 pension annually. Their 18.54 years life expectancy (divided into the $200,000) would entitle them to treat $10,790 as a deductible amount so none of the pension would be assessed for the income test.
If $10,000 was taken as a lump sum for home repairs, the new deductible amount would be about $10,250 ($200,000 less $10,000 divided by 18.54). Although this is still more than the $10,000 minimum pension, if this strategy is implemented after January 1 it will require the income test method for the age pension to change to the deeming rules – and more income being assessed when deeming interest rates rise.
If, on the other hand, $10,000 of extra income is taken in pension form, says LaGreca, while it won’t require a deductible amount recalculation and restructure that will result in the deeming rules beginning to apply, there will be extra income above the deductible amount that must be taken into account when assessing an age pension entitlement.
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.
