On 1 January 2015 the rules regarding how Centrelink assess the income from allocated pensions changed. These pensions no longer receive concessional treatment under the Centrelink Income Test. In this article we explain the changes.
Under the old rules, only a portion of the pension income (and sometimes none of the pension income) was assessed by Centrelink.
Lets look at an example of a 68 year old male on the Centrelink Age Pension. Let’s assume he has an allocated pension of $200,000 and is drawing the minimum payment of 5% of the account balance – $10,000 pa.
Under the old rule, Centrelink would make an allowance for some of this income being classed as capital being returned to the investor. They’d look at the average life expectancy for a 68 year old male – 16.24 years – and divide the starting capital by this amount. So they’d divide $200,000 by 16.24 to arrive at a figure of $12,315. This is called the deductible amount and is deducted from the amount of income you draw from the pension. Because Centrelink would class this amount as a return of capital, it wasn’t assessed as income.
In this example, because the client is only drawing $10,000 from his pension, none of the income is assessed under the Centrelink Income Test. If he was drawing a higher amount – say $15,000 pa – then only $2,685 ($15,000 – $12,315) would be assessed as income.
How Do The New Rules Change The Assessment?
Under the new rules, the pensions are deemed as a financial asset. So it doesn’t matter what amount you’re drawing from the pension. The income is assessed on the value of the asset.
You can read about the deeming rules at this link. For our example, let assume the male is married and they’re both receiving a Pension. The first $79,600 of their financial investments are deemed to earn income at 2% per annum and any amount over that is deemed to earn income at 3.5% per annum.
So on the $200,000 the first $79,600 is deemed to earn 2% pa ($1,592) and the remaining $120,400 ($200,000 less $79,600) is deemed to earn 3.5% ($4,214).
In total, his pension is deemed to earn an income of $1,592 + $4,214 = $5,806.
Now, if this was the only investment he had (i.e no money in the bank, shares etc), then it won’t make much difference to his Age Pension – they’d both still get the full pension.
But if he had more money – say a total of $300,000 – then their Age Pension would be reduced.
If you are assessed under the old system, then it’s important to not change that (unless your balance is low enough that it won’t make a difference to your Age Pension).
Changing your pension (i.e. moving to another provider) will be classed as starting a new pension which will be assessed under the new rules.
Before you make any major decisions around changing your pension, it’s worthwhile getting professional advice, otherwise you may find that there are some uninteded consequences.
Is This Change A Good Idea?
I can understand why the government has made this change. The amount of Age Pensions it will have to pay over the next forty years is huge, and they’re looking at ways to reduce the level of pensions they have to pay.
However, they’re now reducing the benefits of allocated pensions. The remaining benefit is the tax-free nature of the income when you’re over age 60. This is the only significant benefit that remains.
So if someone was retiring today and had to choose between investing into an allocated pension or a non-super investment like a term deposit, there’s less incentive to choose the pension.
Why is this important? Because people view the pension as a long term investment to be drawn down over the course of their retirement. When they take the money out of that environment and put it into a non-super investment, the money becomes easier to get to and spend.
So whilst the change in the short term helps the government by reducing the level of Age Pension is pays to new pensioners, I wonder if in the long term they may be shooting themselves in the foot as more older pensioners use up their capital faster and then qualify for the full age pension earlier.