Why you need to start a pension before the end of the year

SMSF technical expert and columnist for The Australian newspaper
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The deeming of pension income for both the Aged Pension and Commonwealth Seniors Health Card (CSHC) holders is big news. Although these changes are not yet law, for many it might be best to assume they will become law.

What are they?

CSHC recipients need to pass an income test. This test counts taxable income, reportable fringe benefits, salary sacrifice super contributions and personal super contributions claimed as a tax deduction and net investment losses.

From 20 September 2014, singles can earn up to $51,500 per annum and a couple $82,400 per annum. (These income thresholds have now been indexed because of legislation that recently went through Parliament.) Special rules apply if you have dependant children or a couple who lives apart due to illness.

Income from super pensions is currently exempt because it doesn’t form part of taxable income for those aged at least 60.

But deeming of account-based pensions for this income test will change this. Pensions that commence after December 31, 2014 will have their assets deemed and the income counted in this income test.

Pensions that commence before then will remain exempt from this test.

Lost CSHC eligibility

You will need to carefully weigh up your situation to determine when it might be best for you to commence an account-based pension as the deeming of post-December 2014 account-based pensions will see some people lose access to the CSHC.

So for some, it might be better to consider commencing a pension before New Year’s Day in 2015 to maintain access to this card.

CSHC recipients also receive a senior supplement. The last of these payments will be made on 20 September 2014, assuming the government can get its legislation through Parliament.

But in some good news, the government will allow CSHC holders to keep their card if they’re out of Australia for up to 19 weeks (at the moment you can only be abroad for up to six weeks). This change commences on 1 January 2015.

Age pensions better off pre-Jan 2015

Age pensioners will also have their account-based pensions deemed if the pension commences after December 2014.

Age pensioners need to work out if they’re better off under the new deeming rules or under the existing arrangements.

Initially, most retirees would be better off under the pre-January 2015 rules. However careful analysis is required. For example, if the account balance of your pension will decrease (because you will be using that account balance to give you retirement income) then it is highly likely, assuming all other rules remain the same as now, that at some point you will probably be better off having your pension subject to the deeming rules.

If you intend not to use your pension’s capital for income payments (and this is a very wise decision), then it’s likely that the pre-January 2015 rules will leave you better off.

Reversionary pensions

A reversionary pension is one that will continue to pay income to a nominated beneficiary (typically a spouse) after your death.

The advantage here for pensions that commence before January is that they will continue to be exempt when it begins to be paid to your spouse after death. This exemption is part of the age pension changes, however, it’s not contained in the current version of the CSHC amendments. But the Department of Social Security has said that it will administer the age pension and CSHC consistently.

Post December 2014 CSHC applicants

Any new applicant for the CSHC after December 2014 will have their pension deemed even if that pension commenced before January 2015. (It’s my understanding that this doesn’t apply to new age pension applicants.)

This will apply to all new applicants, including those who have a spouse who is eligible for the CSHC and receives the current account-based pension income exemption.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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