New rules for government pensions

1 Oct

New rules for government pensions

New rules

Will the changes reduce the amount you receive?

From 1 January 2015 new Centrelink rules could affect your government age pension entitlements for the rest of your life. Let’s look at what the changes could mean for you.

Have you spoken with a financial adviser recently?
It pays to be aware that if you receive a government age pension and set up or make changes to an account-based pension after 1 January 2015, you may be worse off. You have limited time to work out whether reviewing or setting-up an account-based pension before 1 January 2015 will help you—it’s a good time to seek advice.

What will the changes mean for you?

All account-based pensions (ABPs)—including allocated pensions—set-up after 1 January 2015 will be assessed the same way as other financial assets. So if you’re receiving a government age pension it may be reduced as a result. This also applies to those ABPs set up before this date that are not eligible to preserve the old rules.

If you’re eligible, it’s not too late to set up an ABP before 1 January 2015 under the current rules. In fact, doing so may preserve your government age pension entitlements.

Are you eligible?
If you have money in super but you haven’t set up an ABP yet, you may be able to preserve or maybe even increase your government pension entitlements if you are:

Male or Female and aged over 65 at 31 December 2014
Receiving a government age pension by 1 January 2015.

When’s the best time to set-up an ABP?

As an example let’s take a look at Jane and Michael’s situation to see how the changes to Centrelink will work.

Jane and Michael are about to retire in November 2014 as they will reach age pension age of 65. They own their own home and have super of $150,000 (Jane) and $135,000 (Michael) and no other assets.

If they leave their money in super then Centrelink will deem it to earn 2% p/a on the first $79,600 and 3.5% p/a on the balance (i.e. income of $14,481). They are currently entitled to an age pension of $32,337 p/a combined under the income test. If the deeming rate was to increase to say 4% and 5.5% respectively, then their age pension would reduce to $29,487 p/a combined, a drop of $2,850. On the other hand, if Jane and Michael used their super balances to start ABPs before 1 January 2015 and draw the minimum income of $14,250 combined, then only $31 is counted under the income test and they would receive the full age pension of $33,035. This is $698 p/a more than if they left their money in super. The reason for this is that under the current income test for ABPs, an amount is ignored each year worked out by dividing the initial start balance by their life expectancy at that time. In this case Jane and Michael can draw up to $6,938 p/a and $7,281 p/a before anything is counted under the income test. And better still – if the deeming rate was to increase to say 4% and 5.5% respectively, then their age pension would not be impacted and remain at the full level.

But if they wait until 1 January 2015 to transfer their super money to ABPs, then they will be subject to the new deeming income test for ABPs, which will deem their ABPs to earn 2% p/a on the first $79,600 and 3.5% p/a on the balance (i.e. income of $14,481). This is no different to leaving their money in Super and they will receive a reduced age pension of $32,337 p/a.

What if you make changes to your existing ABP?

Any changes you make to your ABP after 1 January 2015 could make your ABP assessable under the new rules—for example, if you:

Change your ABP provider
Combine multiple ABPs or consolidate super into your ABP
Add or remove a reversionary beneficiary (a person you’ve nominated to receive your pension income when you die)
Cease receipt of a government payment Start a death benefit pension for anyone other than a reversionary beneficiary.

It’s important to seek financial advice about whether setting up or reviewing your ABP now will help you preserve any age pension entitlements you may have.

Additional Resources: Centrelink Deeming Factsheet

What you need to know
Any advice in this document is general in nature and is provided by AMP Life Limited ABN 84 079 300 379 (AMP Life). The advice does not take into account your personal objectives, financial situation or needs. Therefore, before acting on the advice, you should consider the appropriateness of the advice having regard to those matters and consider the Product Disclosure Statement before making a decision about the product. AMP Life is part of the AMP group and can be contacted on 131 267. If you decide to purchase or vary a financial product, AMP Life and/or other companies within the AMP group will receive fees and other benefits, which will be a dollar amount or a percentage of either the premium you pay or the value of your investments. You can ask us for more details.