The $158 million cut for pensioners


A new change in the way that superannuation pensions are treated by Centrelink is coming!   Expected to start on January 1, 2015, the change has the potential to affect up to 28 per cent of full age pensioners and 69 per cent of part-pensioners who are income tested under Centrelink’s Age Pensions rules, saving the Government around $158 million over the forward estimates period.

To explain the new changes, let’s first go back to the basics on how Centrelink determines your Age Pension entitlement.

The current system for assessing a person’s eligibility for the age pension is based on two tests. The asset test and the income test – whichever gives you the lowest entitlement is the one that is used.

The current full pension for a single person is $827 per fortnight and $623.40 each for a couple (including supplements).

Test 1 – The asset test

The current asset test limits are shown below.  For example, if you have less than $279,000 in assets as a couple living in your own home, you will receive full age pension.  As your assets increase, your age pension entitlement gradually reduces until you have reached assets of over $1,110,500.

Asset test limits for full pensions

Family    situation For    Homeowners For    Non-homeowners
Single $196,750 $339,250
Couple   (combined) $279,000 $421,500

Assets test limits for part pensions

  For    part pension assets must be less than
Family   situation For   Homeowners For   Non-homeowners
Single $748,250 $890,750
Couple   (combined) $1,110,500 $1,253,000

Test 2 – The income test

The current income test limits are shown below.  For example, if you earn less than $276 per fortnight as a couple, you will receive full age pension.  As your income increases, your age pension entitlement gradually reduces and cuts out fully when you earn just over $72,000 combined income as a couple.

Fortnightly income

Single   for full pensions up   to $156
Couple   combined for full pension up   to $276
If you    are Age    Pension payment reduces to $0 once your fortnightly income reaches this    amount
Single $1,810.20   ($47,065 per year)
Couple   (combined) $2,769.60   ($72,009 per year)

How do you work out how much income your assets/investment earn under the income test?

For most financial assets, including bank accounts, term deposits, shares and managed funds, the actual income received is not counted but instead they are deemed to earn income.  What this means is that Centrelink applies an earnings rate to determine what your investments have produced in income.

The deeming rates on the first $46,600 of financial assets for singles and $77,400 for couples is deemed to earn 2%, with any financial assets above this threshold deemed to earn 3.5%.

Is super treated differently – What happens now with pensions?

Under the current income test, superannuation account-based income streams (pensions) are treated differently from other financial assets as the pension you draw is not fully counted under the income test.

A deductible amount or an exempt amount applies which represents the original capital you contributed into your super fund, and only the amount of pension you draw above this is counted as income.  For example, if your deductible amount was $20,000 and you drew an account-based pension of $20,000, then none of this pension income will be assessed by Centrelink.

How do the new rules differ?

Based on the new rules, the treatment of account based pensions under the income test will change.  The deductible amount will no longer be applicable and the entire account-based pension balance will have the deeming rates applied to it, with the potential of losing thousands of dollars in Age pension.

The treatment of account based pensions under the assets test will remain the same.

What should Age Pensioners be doing?

Seeking professional financial advice around these changes is essential to potentially mitigate the effect of these changes.  Account based pensions in place by 31 December 2014 will retain the current favourable treatment by Centrelink however any new account based pensions established post 1 January 2015 will fall under these new rules.   It’s important to have your financial house in order prior to these changes.

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Olivia Maragna is the co-founder of Aspire Retire Financial Services and has been awarded the WIFS Financial Planner of the Year. Olivia’s advice is general in nature and readers should seek their own professional advice before making any financial decisions.

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Olivia Maragna

Olivia Maragna