Sparing retirees from Government belt-tightening

From 1 January 2015, seniors who are eligible for Government benefits could be impacted by new legislative measures aimed at reining in special concessions relating to the Age Pension and the Commonwealth Seniors' Health Card (CSHC).  

Specifically, income from account-based pensions (ABPs) will no longer be exempt from deeming and this deemed income will be included in the Income Test for eligibility to the Commonwealth Seniors Health Card (CSHC). 

These changes may adversely impact some clients so its timeliness provides an opportunity to engage with clients to review their situation and assess whether there may be a benefit in amending strategies prior to January.  

Deeming of account-based pensions 

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From 1 January 2015 new ABPs will be deemed under Social Security and Department of Veterans' Affairs (DVA) laws. This may have significant implications for retirement planning strategies as Social Security and DVA benefits often form a key component of a retiree's cash flow.  

The impact of the new rules on retirees will vary as it depends on the client's overall income and assets. In many cases it's more likely that retirees with fewer assets will be affected, particularly when they have little other than financial assets, as a result of the way the Income and Assets Tests work. 

If you commence an ABP prior to 1 January and are on an income support payment this will be grandfathered and the income won't be deemed.  

Strategies to consider between now and 31 December 2014 can help make the most of the grandfathering provisions and include:  

  • Ensure clients who currently receive or are eligible  for an income support payment  commence an ABP before 1 January 2015 
  • Consider restarting ABPs where account balances have risen significantly since the commencement of the pension to lock in a higher deduction amount 
  • Review the current provider/platform of the client's account-based pension as any changes made after 1 January will result in deeming  
  • Consider adding a reversionary beneficiary where appropriate, to extend grandfathering status after the death of the primary beneficiary. (Note that this generally involves a recommencement of the ABP and potentially a lower deduction amount applied going forward). 

What won't be deemed?  

While account-based pensions will continue to play an important role in retirement planning, alternative strategies not subject to deeming may be given more consideration from 1 January for those affected by the Income Test and looking to increase Centrelink/DVA payments. These include:  

  • Investment bonds in a family trust structure (where it's the only asset and no withdrawals are made); 
  • Lifetime annuities; 
  • Fixed term annuities (six years+ or life expectancy); and 
  • Non-account-based annuities such as lifetime annuities and six year+ fixed term annuities will continue to be assessed under the existing rules where income received minus the deduction amount is assessed.  

The  Commonwealth Seniors Health Card (CSHC)   

The Government proposes to include tax-free superannuation pensions in the Income Test  used to determine eligibility for the CSHC from January 2015.   

It is important to consider that it is not the actual amount received that will be included, but the deemed amount using the same rules that apply for the Age Pension.  

The card provides valuable concessions to pharmaceutical prescriptions and medical bills as well as some state Government concessions. Australians of Age Pension age that don't receive the Age Pension and earn less than the income threshold for the card are eligible.  

Who will be impacted?  

Grandfathering provisions will be in place for clients with an ABP commenced prior to 1 January 2015 and are existing CSHC holders. This will only continue if clients maintain eligibility for the card and do not recommence their ABP.  

Changing pension providers or restructuring pension assets for other purposes such as estate planning could lead to loss of grandfathered exemptions as they are likely to result in a new pension being commenced. It's important to consider whether these strategies should be undertaken before 1 January. 

It's important to review whether self-funded retiree clients not currently eligible for the CSHC can qualify by 1 January 2015 if they receive an ABP (or are in a position to commence one before that date) to ensure their ABP income remains exempt.  

For those unable to qualify before 1 January, managing their adjusted taxable income (ATI) will be critical. Recently introduced legislation has resulted in the ATI thresholds being indexed in line with CPI every March and September for the first time since 2001.  

Retirees with ATI close to the thresholds will need careful monitoring so alternative strategies that reduce ATI like lifetime annuities and investment bonds in a family trust may be given consideration.    

Nathalie Bouquet is Head of Technical Services at Challenger. 

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