Clearing up the Account Based Pension (ABP) Confusion
The gift that keeps on giving springs forth with yet another offering for battle weary retirees wrestling with January 1 Centrelink changes. This time, the changes to the income test treatment of Account Based Pensions (ABP) will mean couples already in receipt of both Centrelink and ABP income may need to start a brand new ABP before January 1 2015. This is to lock in more generous Grandfathered provisions when one of them dies.

Whilst the January 1 changes are applicable to all retirees, this latest revelation only applies to some couples. You need to tick all of these boxes for this to apply to you.

• One or both of you must already be in receipt of a Centrelink Aged Pension or be claiming an aged pension before the January 1 changes and;
• You must have commenced or will have commenced an Account Based pension prior to that date and;
• You are or could possibly be affected by Centrelink’s income test now or into the future – bearing in mind that deeming rates are at historical lows.

The rate of Centrelink Age Pension you receive is determined by two tests, an income test and an asset test. Whichever test produces the lowest pension is the one used. The January 1 changes are all to do with the income test.

Until January 1, a person already on Centrelink income support payments (Age pension) who starts an ABP gets recognition that part of the annual payment is a return of the invested capital.

For example, a 65-year-old male retiree with $185,400 in super converts this into an ABP . At 65, the male life expectancy is 18.54 years. Centrelink divides the initial investment amount by the life expectancy to give us a figure of $10,000 to reflect the return of capital. This is not the amount you must take out which at 65, is 5 percent of the account balance or $9,270. The $10,000 is deducted from the $9,270 giving a negative number which is rounded up to nil. This is the amount Centrelink will apply to the income test and obviously, is extremely attractive.

Provided you are already getting an age pension and you have established your ABP by January 1 (both need to be satisfied) you can lock in the more favourable current treatment for as long as the ABP keeps running.

Come January, the world changes. From then, any new ABP started after that date is simply included in the deeming system. Deeming puts all financial investments into one big pot and for singles, the first $46,600 is deemed to be earning 2 percent with everything else, 3.5 percent. This annual total is divided by 26 to give a fortnightly amount and applied againt the income test thresholds. For couples, the upper rate break-point is $77,400. In simple terms, that same $185,400 could be deemed to be earning up to $6,489 per annum. More than enough to affect the rate of pension paid for a single and only getting much worse when deeming rates inevitably rise.

The issue is that when one of you dies, simply transferring the fund to your partner will mean that a new ABP is established. And that’s the problem. A new ABP started after January 1 would be under the new rules and hence you lose the grandfather provisions.

The fix? Get with someone that understands how this works and can do some important calculations that compares scenarios but for many, it will require you to start a new ABP before January. The difference is, your partner must become a reversionary owner of the ABP. A reversionary ABP means that it behaves a little like a jointly owned ABP with your partner automatically becoming the sole owner when you die. It becomes complicated because depending on the age of each of you, the higher life expectancy number is used in the initial Centrelink calculations and this can change Age Pension payment outcomes. As before, its tax free and your partner could still cash it out of they chose to. Transferring over to a reversionary ABP is a bit like an insurance policy but make sure you’re not paying too much for the premium by way of fees. Decent planners should help you effect these changes at minimal cost.

Also be aware that it appears that there are differences between super funds. Its all to do with the Trust Deed or book of rules relevant to specific funds. Some of the low cost funds appear to have rules that mean the reversionary "trick" may not be as effective. You need to get with someone that understands these subtle differences.

And. Then there's the Commonwealth Health Seniors Health Card

The federal budget papers contained confusing terminology. Withdrawals from an ABP will not count towards the $50,000 or $80,000 threshold for singles and couples respectively, used to determine eligibility to be granted a Commonwealth seniors Health Card (CSHC). The CSHC is granted to people over Age Pension Age (65) who miss out on a Centrelink Age Pension because they exceed the income or asset test thresholds. Age pension recipients receive a different type of card known as the Pension Concession Card (PCC) which provides similar discounts. If you apply for or only become eligible for a CSHC after January 2015, the deemed income from the ABP will count towards the income thresholds. This is the same treatment for someone who claims a Centrelink Age Pension after that date. Under deeming, the first $46,600 and $77,400 for singles and couples respectively is deemed to be earning 2 percent, any amount above this. 3.5 percent per annum.

When interest rates rise, the deeming rates will rise and this will affect your Centrelink benefit if you have deemed investments.

Financial assets deemed, currently include bank accounts, shares, managed funds, bullion, gifts over certain limits and superannuation in accumulation phase if over pension age. From January, ABPs are included as well. This means that a single could have $1,448,543 or a couple, $2,318,886 in financial assets before they would lose or could not qualify for a CSHC. Most importantly, if you have a CSHC before the change (or are on an Age Pension) and an existing ABP, the existing rules will be grandfathered meaning current rules will apply beyond January. The grandfathering does not apply to a partner that does not qualify (because of age for example). That means your partner’s ABP could count against you. One final point. If you change your ABP after January, the new rules apply. Grandfathering is not portable. This is a very significant issue if you are unsure about the suitability of your ABP - particularly applicable to those in expensive-to-run funds and SMSFs. If you decide the SMSF is too hard to run when you are 85, changing then could see you lose your card at the time it is most needed