Rule changes for retirees on 1 January 2015.

Changes the Labor government made to the Centrelink treatment of account based pensions (ABPs) come into effct on 1 January 2015.

The new rules mean that ABPs purchased from that date will be assessed diffrently under the income test, and as a result, some retirees could see their age pension or DVA pension entitlement reduced.

For those retirees who will be affcted by this rule change, a sound strategy could be to ensure they invest in an ABP prior to 1 January 2015.

What effect will the different assessment have on age pension benefits?

ABPs purchased prior to 1 January 2015 are lightly assessed under the income test, with usually only a small portion of the received income counting as income for Centrelink/DVA purposes.

However, under the rule change, an ABP purchased from 1 January will be deemed to be earning income at set rates irrespective of whether or not they are earning that level of income, or the owner is receiving that level of income.

Here’s an example.

Let’s say John and Mary are homeowners, both aged 65.They are both retired but Mary does some bookkeeping work for a friend and earns $17,000 p.a. John has $350,000 in a superannuation fund and Mary has already cashed all her super out. They have term deposits and cash totalling $50,000. Their other assessable assets amount to $15,000. This gives them total assessable assets (for Centrelink purposes) of $415,000.

John has only just retired and has yet to turn his super into an account based pension. If he does so before 1 January 2015,none of his income from the ABP will be assessed. So, with the deemed income assessed against the term deposit and cash, and Mary’s assessable employment income, the couple’s combined assessable income for Centrelink will be just $11,500 p.a. and their assessable assets will be $415,000.

As a result, they are assessed under the income test and their combined age pension will be $28,055 p.a.

However, if John purchases an ABP after 31 December 2014, he would not get the benefi of the light income test assessment.

So with John’s ABP treated as a deemed asset, plus deemed income from the term deposit and cash, plus Mary’s employment income, the couple’s combined assessable income for Centrelink increases and their combined age pension will therefore reduce to $25,106 p.a.

This means they’ve lost $2,949 p.a. in Centrelink benefis simply because John delayed purchasing an ABP until after 31 December 2014.

It’s worth noting that deeming rates are currently the lowest they have ever been. If and when the deeming rates increase, the couple’s assessable income would increase and their pension entitlement would fall further (assuming John purchases an ABP from 1 January 2015).

Who is likely to be affected by the rule change?

The rule change will only affct recipients of Centrelink/DVA entitlements (as at 31 December 2014) who purchase an ABP after 31 December 2014, or who switch to a new ABP after that date.

Those people with signifiant assets are not likely to be impacted as their entitlement to the age pension will be assessed under the assets test, not the income test.

Our analysis suggests that those retirees who are or who will be subject to the income test and who purchase an ABP prior to 1 January 2015, could benefi from higher Centrelink benefis ranging from hundreds of dollars a year to many thousands of dollars a year.

For those people it will pay to seek professional fiancial advice as soon as possible to ensure your Centrelink entitlements are maximised.

It is critical, also, that where one member of a couple is currently in receipt of the age pension and the spouse is working, the couple should seek advice soon on the options they have to maximise their age pension.

Assumptions for case study: John purchases an ABP for $350,000 and draws the minimum allowable pension income ($17,500 p.a.). Centrelink rates and thresholds as at 1 October 2014. Age Pension benefi includes the pension supplement and the energy supplement. The work bonus applies to Mary’s salary.