Deeming extended to account-based pensions

Income test advantages for account-based pensions will cease to apply from 1 January 2015 with the passage of the Social Services and Other Legislation Amendment Bill 2013 through the Senate on 25th March 2014 (Royal Assent is expected shortly).

Account-based pensions are currently fully assessable under the assets test but are "pension-friendly" under the Centrelink/Veterans' Affairs income test. Only income received above the deductible amount is included as assessable income.

The legislation will align the income test treatment of account-based pensions, for products assessed from 1 January 2015, with the deemed income rules applying to other financial assets.

Account-based pensions held by means-tested income support recipients (pensioner or allowee) immediately before 1 January 2015 will continue to be assessed under the previous rules unless recipients choose to rollover to a new account-based pension after that date.

Example

Leo is a single homeowner who would like to know how these changes will impact his age pension entitlements.

He has $250,000 in superannuation which he would use to purchase an account-based pension when at age 65. Leo elects a 6% drawdown each year with income in the first year of $15,000 (his life expectancy at the time is 18.54).

Commencing an account-based pension before 1 January 2015

Under the income test, the current (deductible amount) rules will continue to apply unless he  has not started to receive a Centrelink/DVA benefit before 1 January 2015 or rolls over to a new account-based pension after that date.

Assessable income

= Annual payment - [Purchase price / relevant number]

= $15,000 - [$250,000/ 18.54]

= $15,000 - $13,484

= $1,516 per annum or $58.31 per fortnight

Commencing an account-based pension from 1 January 2015

Under the income test the assessable income is calculated as (using 20 March 2014 rates):

Deemed income

= [($250,000 - $46,600) x 3.5%] + [$46,600 x 2%]

= $8,015 per annum or $309.65 per fortnight

The new rules have had a greater impact under the income test for Leo, with an additional $251.34 counted as assessable income.

However, the assets test is the driving test for Leo with pension eligibility of $762.92 per fortnight (compared to $765.97 per fortnight under the income test).

Although the income test impact is greater under deeming, this does not yet affect the eligible pension payment for Leo due to the greater impact of the assets test. As assets are diminished over time, or if deeming rates are increased, the income test may have a greater impact.

The higher assessable income would also lead to higher fees if he needed to move into residential aged care.