From January 1 2015 Centrelink will apply a stricter method in relation to assessable income so as to calculate government payment of benefits to retirees.
The deadline means that there is a fast-closing window of opportunity for those most impacted, enabling the “grandfathering” of age pension and seniors heath card entitlements under current rules.
Those who are likely to be affected should be taking advice as soon as possible.
Previously only asset tested, Centrelink will soon extend the same income test based deeming rules to account-based pension income streams, which currently apply to financial investments such as bank deposits, shares and managed funds.
From 1 July 2014, the first $48,000, for single pensioners and $79,600 for pensioner couples of financial investments are deemed at 2 percent per annum.
Any financial investments over these thresholds are deemed at 3.5 percent per annum.
This extended deeming test will 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 assessment rules unless they choose to change products.
The existing rules allow for a ‘deductible amount’ which is calculated by dividing the pensioner’s life expectancy by the purchase price of the 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 percent 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 include untaxed superannuation income in the assessment of income to determine eligibility for the Commonwealth Seniors Health Card (CSHC).
The CSHC is a valuable asset for self-funded retirees.
Not only does the CSHC provide discounts on Pharmaceutical Benefits Scheme prescription medicines, it also gives access to discounted medical services, selected forms travel and local authority concessions.
Until December 31, the health card test presently allows a single self-funded retiree to earn $50,000 a year and couple $80,000 and receive the card with its medical and pharmaceutical concessions.
This means that account-based income streams for CSHC purposes will be treated under the existing deeming rules for the age pension.
All account-based pension income streams held by CSHC holders before the transition date of 1 January 2015 will be grandfathered under the existing rules.
Check your situation
The financial position for each person or couple can be very different, and the looming changes can add a further layer of complexity whereby the ideal outcome may vary from one person to the next.
It may be beneficial for some to ‘lock in’ their pensions before 1 January 2015 to ensure their treatment is grandfathered under current rules.
When considering strategies that may affect entitlement to the health card or Age Pension, if deeming applies and the interest rates used that are applied to deeming rise, then the level of income assessed under the test will increase.
This may result in the health care card being lost or the fortnightly Pension benefit being reduced.
When establishing a self-funded pension, one of the choices available to members who think ahead about what might happen when they die, is to elect making it a reversionary pension.
This is where the pension continues automatically to the beneficiary under exactly the same terms as the original pension.
However a CSHS card holder can lose their entitlement if they inherit their late partner’s super as a death benefit, after 1 January 2015, that isn’t a reversionary pension.
If there is any change to the pension after 1 January 2015, an existing CSHC card holder will have their pension counted as income, and they may lose their concession card.
Where such a benefit goes to a financial dependant, they have a choice of taking this as a lump sum and adding this to their super pension or converting it to a new pension.
But where they follow this path the change in pension arrangements will result in the loss of any grandfathering of the health card income test.
When reviewing many of the various scenarios, it appears that grandfathered pensions may provide the most flexibility in potential social security outcomes.
However rules continue to change and retirees will need to stay on top of entitlement amendments.