Whilst much attention has been given to the Assets Test reduction since the federal budget was announced, a change to Centrelink’s income assessment of funded defined benefit pensions has received little attention and to some retirees it is a real ‘sleeper’, says Andrew Rafty, senior financial adviser at the Findex Group, Australia’s largest non –aligned financial planning and accountancy group.
“This change, which is to commence on 1 January 2016, affects all funded defined benefit pensions,” he adds.
“The change is simple but can have a large effect on the level of age pension received. From 1 January 2016, the level of income derived from defined benefit superannuation that can be excluded from the age pension income test will be capped at 10%,” he said.
“These usually indexed pensions are the majority of state-based public sector and private pensions. Examples of these pension schemes are NSW State Super, NSW Police Super, Commonwealth Bank Officers’ Super , Uniting Church Super, HP Super, to name a few.”
“ It’s important to note that the defined benefit pensions not affected by these changes are the unfunded pension schemes. Unfunded pensions are paid from our taxes via consolidated revenue and are currently 100% assessed by Centrelink. Examples are the Commonwealth Super Scheme (CSS) and Defence Forces Retirement and Death Benefit DFRDB.”
Funded defined benefit schemes have assets set aside to back the pensions and whilst in the accumulation phase taxation has been paid on the earnings of the fund. The proportion which is currently not assessed as income for by Centrelink is directly related to the pre-1983 service period and the level of post-taxed (non-concessional) contributions.
“So the proposed changes will affect those pensioners with a high pre-83 service and/or high non-concessional contributions,” he added.
“The minister for social services, Scott Morrison, has described the proposed changes as “closing a loophole” and he is correct here.”
“The changes came into effect on July 1 2007 and were part of Peter Costello’s revamp of superannuation, where massive changes were made to both simplify and eliminate tax revenue from retiree’s super pensions from age 60. At the time, those responsible for the changes did not understand the positive (for the retiree) and negative (government revenue) effect Costello’s changes would have on the age pension entitlement, nor for that matter, on many thousands of retirees who now became eligibility to a Commonwealth Seniors Card.”
“Also, at the time Treasury could not provide estimates of the tax revenue lost from ‘tax free/simple’ super.”
Who will it affect?
The proposed changes has the potential to affect many current Age pensioners who have a non-assessed portion of their defined benefit pension greater than 10%.
It will definitely affect those who are already income test critical (as compared to the other Centrelink criteria – the Asset test) as it increases the level of income assessed.
There are also those pensioners whose level of Age pension is determined by the level of their assets i.e. Asset Test critical. These pensioners can also be affected if the extra income being assessed causes them to become income test critical.
For couples and singles, every extra dollar assessed has the potential to decrease their age pension by 50c.
Example: A Centrelink pensioner couple receives a CPI indexed pension from the husband’s former employer’s super scheme of $60,000 pa. They are Income Test critical.
Currently 46% of this is non-assessible by Centrelink due to the Costello changes in 2007.
Under the government’s 2015 proposal this retired couple will have assessed an extra 36% of the 60,000 and therefore will lose $10,800 pa in age pension.
About the Findex Group:
The Findex Group is one of Australia’s largest non-aligned and privately owned financial advisory and accounting groups. It has businesses across the spectrum of the financial advice and accounting industry including middle range, high net worth, public sector and online.
The Findex Group’s portfolio of financial services brands and businesses includes Financial Index Wealth Accountants, Centric Wealth, Crowe Horwath Australasia, MOVO, CIVIC Financial Planning and Prescott Securities.
Findex Group businesses have more than $15 billion under management.
Findex has been awarded the IFA Excellence Awards for best dealer group 2014 and listed in the BRW 2014 Most Innovative Companies list.
More about the Findex Group: www.findexgroup.com.au
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