One super reform you can’t ignore

Whilst many of the tax and super reforms introduced by the former Federal Government have been scrapped, one proposal the current government has decided to keep is the ‘deeming’ of account based (formerly called allocated) pensions for social security purposes from the 1st of January 2015. Pensioners beware.

Pension Assessment

Currently only a portion of the account based pension paid to an account holder is assessed, the total being reduced by an amount called the ‘deductible amount’.The deductible amount is calculated on the commencement of a pension by dividing the starting account balance by the pensioner’s life expectancy at the time.

For instance, under current rules, if Pat had accumulated $500,000 in her super and started drawing an account based pension when she turned 65, her deductible amount would be $23,127 ($500,000 divided by her life expectancy of 21.62 years). If Pat drew the minimum

Account Based Pension of 5% or $25,000 per annum, the net assessable income for Centrelink would be just $1,874.

However, if Pat did not start her account based pension until after the 1st of January 2015, under the new rules, the value of her account based pension ($500,000) would form part of her total financial investments and would be deemed under the rates in force at the time.

Under current deeming rates, her assessable income would be a minimum of $17,034. In most cases, this would have a substantial impact on Pat’s Centrelink entitlement.

Whether you will be worse off under the new rules will depend on your total situation, but you need to look into it now. Those most affected are likely to be couples (especially if one is still working), those with other defined benefit pensions such as Comsuper and ESSS, and those with lower account balances.

Those already receiving an account based pension and an age pension will continue to be assessed under the existing more generous rules, that is, they’ll be ‘grandfathered’ unless they rollover from one pension product provider to another. This move will trigger their transfer to the new regime. Can you imagine how many will be unwittingly caught by this? The take- home for all is – make sure you are in the most flexible superannuation pension structure prior to the 1st of January 2015, because you’ll be there for a long time, locked in and able to take advantage of the grandfathering.