This article highlights one change which seems to have gone largely unnoticed.There is much hype in the media at the moment regarding what changes may or may not be made in this year’s Federal Budget in relation to the Age Pension.
It goes without saying that the government’s Aged Pension system is complicated.
The task of understanding the system becomes even more confusing when you try and reconcile it with superannuation and other investments that entitle you to a part-pension.
A particular quirk of the system is that if you get things wrong and happen to be overpaid you will have to fully repay the amounts to Centrelink. However, if a mistake results in you being underpaid, there is no mechanism for getting back any underpayment.
This just highlights even more the importance of making sure you know before you retire what you can expect from your superannuation or investment property in conjunction with your entitlement to any Aged Pension entitlement.
From 1 January 2015, super pensions will be assessed under the Centrelink “deeming rules” thanks to a change to the social security income test.
The legislation for this change has passed the House of Representatives and is being examined by the Senate.
The change was proposed by Labor when it was in government and introduced into Parliament by the Coalition after the federal election. It would appear that it is just a matter of having the legislation rubber stamped.
That said, as the start date is not until 1 January 2015, there is an opportunity for anyone who may become eligible for the Aged Pension between now and the end of the year to put a super pension in place that will operate under the current more generous rules.
When you start a pension from your super and you also qualify for the Aged Pension, the entire account balance is considered an “assessable asset” under the social security asset test.
Furthermore, the pension income is separately assessed under the “income test”.
Of the two (2) tests, the asset test is tougher because, as well as any super and investments you have, it includes lifestyle assets other than your family home. This means the contents of your home, car, boat and other personal leisure assets.
The income test, on the other hand, has differing ways of assessing more conventional retirement assets like super, investment properties, shares, money in the bank and managed funds.
As well as being counted under the assets test, financial assets – which include shares, managed funds and bank deposits – are deemed to earn a certain level of income according to a formula set by the government. This is based on their market value and whether a single retiree or couple owns them.
Instead of the actual income earned by the investment being counted under the income test, for couple owned investments deeming gives them the income value calculated at 2% for the first $77,400 and 3.5% on the balance.
As far as super is concerned, while the account balance is assessed on the assets test the income testcounts the super pension minus a special incometest deduction determined by the dividing the account balance by a retiree’s age and life expectancy when the pension begins.
For example, a male retiree who starts a super pension at 65 can claim a deduction against the pension income that they withdraw from the super by dividing the account balance by a life expectancy factor of 18.54.
A retiree with a $300,000 super account balance is therefore entitled to deduct $16,180 annually from any pension taken.
Only pension income greater than this, is assessed for theincome test.
However, from 1 January 2015 any new super pensions will be assessed under the deeming rules.
If you would like some assistance or guidance with your planning for the Aged Pension please contact Ellingsen Partners.