Scott Quinn explains that there is more to account-based pensions than tax – Social Security must also be considered.
It is no surprise that most discussions centred on account-based pensions are taxation driven. Predominantly the focus is on tax-free investment returns, tax-free pensions for those at least age 60 (from a taxed source) and the salary sacrifice/transition-to-retirement strategy.
Equally important are the Social Security implications. By understanding these implications, decisions can be made and strategies can be implemented that could mean the difference between thousands of dollars of Social Security entitlements and access to a range of benefits provided through Government concession cards.
Social Security assessment of account-based pensions
Most Social Security income support payments are subject to an income and assets test. The asset test assessment of an account-based pension is simple: the account balance is assessed as an asset (regardless of age).
This is particularly important for Social Security recipients under pension age, where assets are being moved from an exempt superannuation accumulation interest into an asset-tested account-based pension.
The income test is a little more complicated. Only account-based pension payments exceeding a certain amount (the Centrelink deductible amount) are assessed under the income test. The Centrelink deductible amount is shown in figure 1.
Nominating a reversionary beneficiary
If you nominate a valid reversionary beneficiary the account-based pension will continue to be paid to the nominated reversionary beneficiary on the death of the original owner. Under this nomination the superannuation fund trustee has no discretion as to who or how the benefit will be paid upon death of the original owner.
Before you nominate a reversionary beneficiary on an account-based pension you need to consider the Social Security implications. As a general rule, the Centrelink deductible amount of an account-based pension will be reduced where:
- The original owner is male and they have nominated a female as a reversionary beneficiary and the female is not considerably older;
- If the original owner is female and they have nominated a male as a reversionary beneficiary and the male is considerably younger; and
- The original owner nominates someone of the same sex as a reversionary beneficiary (who is younger).
A reduced Centrelink deductible amount is a particular concern for an income tested Social Security recipient – or one that is likely to become an income-tested client in the future.
Case study one
Callum (68) and Sarah (65) are about to commence account-based pensions. Callum has $350,000 in superannuation and Sarah has $100,000. Their age pension entitlement is currently reduced under the income test. Callum’s life expectancy is 16.24. Sarah’s life expectancy is 21.62.
The impact of nominating Sarah as a reversionary beneficiary on Callum’s account-based pension is illustrated in table 1.
Callum draws a pension payment of $21,000 for the year. If Callum nominates Sarah as a reversionary beneficiary their combined age pension entitlements will reduce by $2,406.
Given Sarah’s life expectancy is greater than Callum’s, the Centrelink deductible amount of Sarah’s account-based pension will remain the same regardless of whether Callum is nominated as a reversionary beneficiary.
Commuting an account-based pension, allocated annuity or allocated pension to reset the Centrelink deductible amount
Naturally, as someone gets older their life expectancy decreases. If the balance of an account-based income stream remains the same or relatively high, the Centrelink deductible amount may be increased by commuting the account-based pension and starting a new one.
Case study two
Brayden (65) commences an account-based income stream with $500,000. His Centrelink deductible amount is: ($500,000 – 0) / 18.54 = $26,96.
The result after five years, if Brayden commutes his account-based pension and commences a new one (assuming new life expectancy is 14.76), is shown in table 2.
Any costs involved (eg, buy/sell spreads, entry/exit fees in relation to the account based pension) would have to be taken into consideration against any potential Social Security benefits gained.
Using nominated beneficiaries to maintain a Social Security entitlement for the partner
The death of one member of a couple can have a significant impact on the surviving member’s Social Security entitlements.
The income and assets required to receive a part age pension, comparing couple homeowners to single homeowners, is shown in table 3.
If the surviving member of the couple loses their entitlement to age pension, they also lose their entitlement to the Pensioner Concession Card. They may become entitled to another concession card, but it won’t have the same level of benefits.
To minimise the Social Security impact where one member of a couple dies, all or part of the account-based pension could be directed to someone other than the partner upon the death of the original owner. This could be achieved either by the Will or by nominating a child, financial dependant or an interdependent as a beneficiary.
Case study three
Holly and Michael are asset tested and receive a combined age pension of $11,346. Their combined assets are $700,000.
Both Holly and Michael have an account-based pension of $200,000 each. If either Holly or Michael passed away and the surviving partner maintained ownership of all combined assets, they would lose entitlement to the age pension and the Pensioner Concession Card (allowable assets for a single age pensioner is $668,000).
Alternatively, if Holly and Michael each nominated their children to receive half of their account-based pensions upon death, the surviving partner’s assets would reduce to $600,000. This would generate an age pension of $2,650 and maintain access to the Pensioner Concession Card.
Summary
Understanding the Social Security implications of an account-based pension is extremely important. Right from the commencement of the income stream to estate planning, important decisions need to be made and/or opportunities to maximise Social Security entitlements may present themselves.
Failure to make the right decisions or to recognise opportunities could result in the loss of thousands of dollars of Social Security benefits and/or the loss of valuable concessions on offer to the holder of a Government concession card.
Where there are competing interests, the importance of each must be taken into consideration.
Scott Quinn is technical services manager at OnePath.
