However, an overlooked change was one measure that’s due to take effect next 1 January.
Proposed changes to the social security income test assessment rules will impact on new account-based income streams (ABPs) established after that date.
From 1 January 2015, new ABPs will be subject to Centrelink’s deeming rules for assessment under the income test.
Changes to give effect to these measures were introduced into Parliament on 20 November 2013.
Having also progressed through the House of Representatives, they await passage through the Senate.
Beginning in 2015, the ABP is losing its deductible amount, and the entire balance in the superannuation fund that is paying the ABP will be subject to the deeming rates.
Deeming assumes that all financial interests earn a certain rate of income, regardless of the amount of income or growth they actually produce.
For couples, these are currently two percent on the first $77,400 and 3.5 per cent on the balance.
For singles, the threshold is $46,600.
For example, under current rules, if a male retiree aged 65, and with an ABP balance of $200,000, takes a five percent pension ($10,000) from his super savings, his pension amount won’t be assessable under the income test.
This suggests entitlement to the full single age pension of $827.10 per fortnight, but reduced slightly to $822 per fortnight after applying the existing assets test.
However, after 1 January 2015, the income test deeming rules result in a lower age pension entitlement in the order of $784 per fortnight.
Given the actual age pension must be the lowest amount after entitlements to the income or asset tests are calculated, this means such a pensioner will be $43 worse off each fortnight.
So that individuals with income streams already in place are not adversely impacted by these changes, some grandfathering of the existing rules will be available, provided the income support recipient and the income stream meet all of the following four criteria;
The person was receiving an income support payment immediately before 1 January 2015; a qualifying account-based pension or annuity was already being provided to the person immediately before 1 January 2015; the person has continually been receiving a Centrelink income support payment since 1 January 2015; and that income stream has continued to be provided to the person since 1 January 2015.
The good news is that those currently in receipt of the Age Pension who have ABPs in place will remain under the existing rules provided they do not become ineligible for pension assistance at a future date.
It’s important to remember that all four of the above criteria must continue to be met.
If one of them is not at a future point in time, or if people change pension products, the grandfathering benefits disappear and cannot be reinstated in the future.
There are planning opportunities for those who are in receipt of or will be entitled to the Age Pension by 1 January, 2015, and are likely to receive a Centrelink Age Pension.
Those who are likely to be affected should be taking advice sooner rather than later.
The Federal Government’s rationale behind the change is that by treating all financial investments in the same way, theoretically individuals will be encouraged to choose retirement investments based on the merit of the investment itself as opposed to the social security benefit that may be obtained.
However, this simplistic approach ignores the impact of capital gains tax when investing outside of ABPs, and likely redirection of investors’ funds into low-return long term annuities in future years.
The explanatory memorandum for the legislation asserts: “The current income test rules favour people who can only afford to draw down the minimum amount from their income stream each year.”
But after the changes, the Government anticipates many self-funded retirees will receive lower partial Centrelink income support, resulting in claimed savings to revenue of $161.7 million over four years.
The problem with this line of thought is that by encouraging wealthier retirees to spend more, it will result in these retirees receiving a higher Centrelink age pension years sooner, thereby increasing the strain on future revenues.
Unfortunately, further reducing incentives to encourage saving, in an attempt to make the system “fairer”, simply results in everyone being worse off.
By Steve Blizard