Paying pensions from an SMSF under the new Centrelink rules from 1 January 2015
Recent legislative changes have substantially revised the ‘income test’ rules for a Centrelink and Department of Veterans’ Affairs (‘DVA’) pensions and allowances, including the Age Pension.
From the 1st of January 2015, Centrelink has altered the way that Account Based Pensions (e.g. the pension that you withdraw from your self-managed super fund, retail or industry super fund) are assessed for the purpose of determining your Age Pension entitlement.
These changes impact those who:
- Commence an Account Based Pension after the 1st January 2015; or
- Applied for the Age Pension (or other Centrelink allowance/benefit) after the 1st January 2015.
Rules prior to 1st January 2015
Prior to the 1st of January 2015 an Account Based Pension was assessed by Centrelink as follows:
Account Based Pension assessment = Pension withdrawal – Deductible Amount
The deductible amount is determined by the balance that you commenced your pension with, your age at the time you commenced the pension and any lump-sum amounts that have been withdrawn from your Account Based Pension.
For example: Bill is a single 65 year old. His only asset is an Account Based Pension which:
- Commenced on the on the 31st December 2014 with $500,000
- Deductible amount is $26,969
- He draws an annual pension of $30,000
- He has not made any lump-sum withdrawals
In Bill’s case, Centrelink will assess the pension that is withdrawn above his deductible amount towards the assessment of his income, as follows: $30,000 – $26,969 = $3,031
Total income assessed by Centrelink = $3,031
New rules from 1st January 2015
Under the new rules, the actual pension payment and deductible amount are ignored for income test purposes. Instead Account Based Pensions are subject to the deeming rules.
Account Based Pension assessment = Assessed at Deeming Rates
The deeming rates that apply to financial investments (including Account Based Pensions commenced after 1st January 2015) are summarised on the table below:
Deeming Rules and Rates
SINGLES:
- First $48,000 of financial investments 2%
- Assets above $48,000 3.5%
COUPLE: Provided 1 of you is receiving a pension
- First $79,600 of combined financial investments 2%
- Assets above $79,600 3.5%
COUPLE: If neither of you is receiving a pension
- First $39,800 of combined financial investments 2%
- Assets above $39,800 3.5%
* Minister Scott Morrison announced on 16th February 2015 that these rates will be reduced effective 20th March 2015.
For example: Bill is a single 65 year old. His only asset is an Account Based Pension:
- Commenced on the 2nd January 2015 with $500,000
- Deductible amount is $26,969
- He draws an annual pension of $30,000
Under the new rules his deductible amount and annual pension withdrawal will be ignored. Instead, his pension will be deemed as follows:
The first $48,000 at 2% = $48,000 x 0.02 = $960
Amount above $48,000 at 3.5% = $500,000 – $48,000 = $452,000 x 0.035 = $15,820
Total income assessed by Centrelink = $16,780
Based on the above, Bill’s Centrelink assessable income is much higher under the new rules than it was under the old rules. Commencing a new pension could impact Bill’s Age Pension entitlements.
Please note, these changes impact the assessment under the Income Test only. The Asset Test assessment of the Account Based Pension remains the same.
How do you ensure you make the right decisions about an existing Account Based Pension?
If you have a pension which was commenced prior to 1st January 2015 it will continue to be assessed under the rules which were in place prior to 1st January 2015 (ie it is “grandfathered”).
The only way that your pension could be caught under the new rules would be if:
- The intentional or unintentional stopping of the grandfathered pension (eg by underpaying the minimum pension);
- You were to rollover your pension into a new pension; or
- Your Centrelink Age Pension stops for whatever reason.
It is important that you are mindful of these points and seek advice from Morrows prior to making any changes to your pension.
How Morrows can help you?
Morrows has a dedicated team of professionals who are experts in giving advice in relation to any Centrelink matters. Contact us for help in reviewing your existing pensions and financial plan to make sure you access all your entitlements and benefits.