Seek Advice Before December 2014.....So You Aren’t Caught
If you or your friends or family will have one of the following entitlements on the 1st of January 2015 it is important to seek advice ASAP about the upcoming changes to the rules : -
- Age Pension
- Disability Pension
- Commonwealth Seniors Health Care Card (CSHCC)
The changes will set new rules for calculating your “income” for the above benefits.
Note: even if you are presently Assets Tested not Income Tested for a benefit, there will be a point where you may switch tests – so better to maximise now for that future point in time, rather than have problems that can’t be fixed down the track.
The new rules will apply to people who are not in receipt of these benefits on the 1st of January 2015 and are generally unfavourable.
Also Low Income Care recipients will have the harder tests applied to them and so may find they are not eligible to retain the card – there are no grandfathering provisions extended to LIHC.
If you are not eligible for these cards or benefits as at 1/1/2015 then there is not much you can do to stay under the “Current Rules”.
But for existing card and benefit recipients it is important to seek advice during October and November 2014 to ensure your position is maximised and to avoid changes later on your superannuation pensions and super accounts that would cause you to fall out of “Grandfathering”.
Grandfathering of current exemptions is generous but only if you maintain eligibility into the future.
So What Is The Change?
The main change relates to Allocated Pensions also known as Account-Based Pensions.
Currently the income from Account Based Pensions is favourably treated under the Income Test.
Sometimes none of the yearly pension income drawn from it, or very little, counts towards the Age Pension Income Test.
Suddenly as of 1/1/2015, the rules will change and deeming up to a 3.5% rate on the value of your entire pension account balance will count, which in many cases will mean thousands more counting as “income”.
This will hit particularly hard on people with other income sources as well such as a defined pension from Health Super or CSS, or a share portfolio also being deemed to earn income.
The result could be : -
- A reduction of Age Pension, or cessation of Age Pension altogether
- The loss of the Commonwealth Seniors Health Card
How Big Could The Impact Be? A Case Study
To give you an example of the potential difference, we recently undertook an assessment for a client with the Age Pension.
She is about to inherit money and planned to contribute it to super – but the important factor is the difference between contributing it to super and starting her pension
- Before 1st of January
- After 1st of January
If she adds the extra to super and starts the Allocated Pension now she will be $10,000 p.a. better off under the income test, i.e. receive $10,000 p.a. more in Age Pension.
For this client, taking $35,000 p.a. from her superannuation, which is in an Account Based Pension, plus some additional funds in the bank that are “deemed” to earn income, if we make some changes now to maximise her position, the difference on January 1st 2015 would be : -
Current Rules Income Assessed to be $3,400
New Rules Income Assessed to be $23,400
The difference is that her existing Pension if re-started today will be treated favourably for the Income Test, but if re-assessed after 1st January, will cause the pension asset to be “deemed” to earn income instead.
For every extra $1 of assessable income under the Income Test, it reduces the Age pension entitlement by 50 cents.
So with $20,000 more income in the above example, the Age pension would reduce by $10,000 p.a.
A very good reason to : -
- Add the extra money before 31st December, and start the Pension
And take steps to avoid accidentally losing grand-fathering after January 1st, specifically : -
- Reduce upcoming trips to 18 weeks at a time
- Avoid changes to accounts after 1st of January, without seeking advice first
Changes to make now, to maximise your situation
- If you have superannuation money not providing you with a pension, seek advice as to the suitability of starting a pension now (provided you are preservation age about age 55+).
- Review your existing Account Based Superannuation Pension for any updates that could be favourable: -
- Stop and restart your Account Based Pension as it would cause a favourable increase in the formula used by Centrelink to determine your non-assessable or “Deductible” amount – the amount of your pension each year that is ignored for the Income Test.
- If you have a partner who you wish to inherit your pension money when you die, you may wish to have them placed as the Reversionary Beneficiary on the account – this will ensure the grand-fathering is not lost when they inherit the account (there are other pros and cons so ensure you seek proper advice)
- If you have surplus cash you may refresh your pension and add the extra money, doing so before 1st January (as long as you meet the work test if you are over 65, or aged under 65).
The changes above could be beneficial or could be detrimental to your position depending on the change in your Account Based Pension Account when you first started it and the balance now – you MUST seek advice before making changes.
At the very least , if you do not have a financial planner, then contact Centrelink and make an appointment with a FIS Officer (Financial Investment Service Officer) who can provide direction on the Centrelink rules and how they may impact you, although you may still need to see a Financial Planner to help implement any changes.
There are occasions as well where it is FAVOURABLE to switch onto the new rules – if you are drawing a very large Allocated Pension amount you may have a lower assessable amount under deeming than using the current formula system – seek advice.
What "Events" Do I Need To Be Careful About Into The Future?
If you will be grandfathered on the 1st of January 2015, to ensure you do not switch accidentally onto the new rules later, consider the following after 1st of January : -
- Be careful with overseas travel – with the Commonwealth Seniors Health Care Card (CSHCC) if you stay overseas longer than 19 weeks you will lose the card but also have to completely reapply – and you will be reapplying without the grand-fathering provision – you will be assessed under the new rules
- Similarly for the Age Pension and Disability Pension, although your benefits cease after 6 weeks overseas, reinstatement can occur within 18 weeks under the grandfathering provision. But after 19 weeks you will have lost your grandfathered status and have to reapply under the new rules.
- Changing pension providers will trigger the loss of the grandfathering provisionor other actions that re-start your account could trigger the loss of the grandfathering provision (such as inheriting a spouse’s super that is not through a reversionary nomination)
- If you have an existing pension account, and receive a gift or inheritance, you may wish to start a second pension with the money rather than combine them into one account as the grandfathering will be lost once you close the first pension to add more money
The income from an Account Based Pension is currently not counting towards the income thresholds of $50,000 for a single person and $80,000 for a couple as these are not “taxable” at present and so the definition of income is around “taxable” for the CSHCC. Deeming from 1/1/2015 will mean that many people will lose this all important card if any of the above "events" occur.
Lastly, looking down the track what you decide to do now will more than likely have an impact on how your aged care fees will be determined as it is related to the Centrelink income testing as well.
Please note that any advice contained in this alert is to be regarded as general investment advice and factual of nature rather than personal advice. As it is not possible to take into account each client's individual circumstances, before acting on the recommendations contain in this report clients must determine the appropriateness of a particular recommendation in the light of their investment objectives and financial situation. Past performance is not a reliable indicator of future performance.