Centrelink Changes to Account Based Pensions from 1st January 2015

An Account Based Pension is usually commenced from your accumulated superannuation when you retire. In some cases you  can start one with a lump sum of your own money (for example, from the proceeds of selling a property). With an Account Based Pension you can choose how to invest your money, say in shares or cash, however the Federal Government has rules on how much you must take out each year as a minimum. Meeting this requirement ensures your earnings on your Account Based Pension account remain tax-exempt.

These withdrawals can be taken fortnightly, monthly or even annually, effectively like a salary. For a 65-year-old person, assuming a balance of $250,000, the annual minimum he or she would have to withdraw is 5% ($12,500). This percentage increases with age.

 But now, new legislation will change how this income will be treated by Centrelink.

Deeming rules will apply

After 1 January 2015 Account Based Pensions will be classified as ‘financial investments’. As such, those established after that date will be assessed under ‘normal’ deeming rules. This means that all financial assets will be assessed under the same rules.

What is important to note is that the ‘old’ rules are kept in place for existing pensions, so if you already have a pension in place, and are in receipt of a specific Centrelink benefit, such as Age Pension, then nothing changes. However, if you swap it (rollover) to a new pension after 1 January 2015 then it will be impacted by the new deeming rules.

Who is affected?

Remember that the deeming rules assume your financial assets are earning a certain amount of income, regardless of the income they actually earn. However, it is still ‘Income’ either way as far as Centrelink is concerned.

If your Age Pension entitlement will be based on the ‘Assets’ test, the changes should not make any difference to you at this time. However, as new pensions (in most cases) will be deemed to earn more income than they would have under the “old rules”, there is a point when the income assessed might be higher than the assets assessed.

What should you do?

If you are considering retirement soon, you should contact a Certified Financial Planner® as it may be worth establishing an Account Based Pension prior to the commencement of the new rules. If you already have an Account Based Pension, reviewing it and making any changes before 1 January 2015 may put you in a better position going forward.

Sources:

Budget 2013-14: Superannuation Reforms - Extending the normal deeming rules to new superannuation account-based income streams  http://www.humanservices.gov.au/corporate/publications-and-resources/budget/1314/measures/older-australians/29-10728

Minimum annual payments for super income streams  http://www.ato.gov.au/rates/key-superannuation-rates-and-thresholds/?page=8

 Important note

Tony Seymour, Ben Adams and Central West Financial Solutions Pty Ltd are Authorised Representatives of AMP Financial Planning Pty Limited ABN 89 051 208 327 (AMPFP), AFS Licence No. 232706.Any advice contained in this document is of a general nature only and does not constitute personal financial advice. In preparing the advice no account was taken of the objectives, financial situation or needs of any particular person. Therefore, before making any decision, readers should consider the appropriateness of the advice with regard to their particular objectives, financial situation and needs.