Time is Running Out to Start a Pension

If you haven’t commenced a superannuation pension, time is running out to start a pension that will be treated more favourably than when new rules are introduced from 1 January 2015.

In November 2013, the coalition government proposed legislation that will reform superannuation deeming rules for the income test when assessing eligibility for the Age Pension. These rules will start on 1 January 2015 and will likely result in eligible pensioners missing out on a good proportion of the Age Pension once introduced.

Under the new rules all financial assets will be assessed under the same rule – the normal deeming rule – which previously excluded financial assets contained within superannuation account-based income streams.

Extension of the deeming rules will potentially have a financially devastating impact for future retirees in relation to their Age Pension entitlements.

Who will be affected by the extension of the deeming rules?

In accordance with the proposed rules, pensioners and recipients of government allowances granted from 1 January 2015, with superannuation account based income streams, will be impacted by the new rules. However, pensioners granted benefits prior to 1 January 2015 will continue to be assessed under the existing rules unless they choose to change superannuation pension products or buy new ones from 1 January 2015.

To be very clear… to preserve the level of entitlement you thought you were going to receive, you need to be in receipt of both the Age Pension and a Superannuation Income Stream PRIOR to 1 January 2015.

Deeming: how does it work and current rates

If you need to claim the Age Pension and you own financial investments (e.g. shares and term deposits), you must be aware that it is the deemed income, not the actual income earned on those investments, that is counted when working out your eligibility for the Age Pension, under the Age Pension income test. “Deemed income” is the assumed rate of return, regardless of what you actually earn on your investments but it is usually set at or just below average market income rates across these asset classes.

From 1 July 2014:

• if you are single person and getting either a pension or an allowance, the first $48,000 of your financial investments is deemed to earn income at 2% per annum and any amount over that is deemed to earn income at 3.5% per annum
• if you are a member of a couple:
  • if at least 1 of you is getting a pension, the first $79,600  of your and your partner’s financial investments is deemed to earn income at 2% per annum and any amount over that is deemed to earn income at 3.5% per annum, or
  • if neither of you is getting a pension, the first $39,800 for each of your and your share of jointly owned financial investments is deemed to earn income at 2% per annum and any amount over that is deemed to earn income at 3.5% per annum

These rates probably sound low to a lot of you correct? But it’s import to remember, interest rates are at all time lows. As interest rates rise over time, this will further reduce your Age Pension eligibility.

How are superannuation pensions assessed for Age Pension eligibility under existing rules?

Currently, super pensions are counted against the income test of the Age Pension through a special calculation which recognises the capital returns that form part of every superannuation pension payment. The account balance of the superannuation fund is also counted against the assets test of the Age Pension.

In relation to the Age Pension assets test, if you are holding a newer account based super pension or an older allocated pension, all of the account balance counts towards the assets test. Whereas, if you run a term allocated pension or an older complying pension set up before 2007, you may not have to count any of them as part of the test.

Impact on future retirees

This change of rule will imply less Age Pension for the same amount of assets as before the change. According to SuperGuide, one of their readers, Kym, has done some calculations regarding the changes and here is what Kym had to say:

To me, the big sleeper for average retirees in the future is the change in the application of the deeming rules to superannuation income streams for age pension income test purposes. By my calculations, if a couple had a super fund balance of $273,000 and no other assets (by no means fabulously wealthy!), they would currently be entitled to a full age pension under the assets test, and in most circumstances would also be entitled to the full age pension under the income test.

But under the new regime (applicable to pensions commenced after 2015), the super account would have deemed annual income of $10,231.50, which would reduce the age pension by about $62 per fortnight. And in the highly foreseeable event that the deeming rate increased to, say, 6%pa, their age pension would be reduced by a further $105 per fortnight.

If you would like to know more about how you can better position yourself to maximise your benefits, contact United Global Capital today and speak with one of our financial strategists for a No Cost, No Obligation consultation on 03 8657 7640 or email [email protected] to learn how you can take advantage of the opportunities available to you.

The information contained in this report is General in nature and has been prepared without taking into account your objectives, financial situation and needs.