Switching pensions? Beware of rule changes

Closing down one pension and starting new arrangements is fraught with difficulty — here’s what you need to know.

The problem with retirement is that because superannuation and Centrelink laws keep changing, it is difficult to keep up to date with everything and to remember all the changes.

One area of the law that I want to warn superannuation fund members about is what can happen if they decide to cease their pension and commence a new pension, either in their self- managed superannuation fund or another superannuation fund. It is particularly important if the superannuation fund member has a superannuation pension that began prior to January 1, 2015, they are in receipt of the Age Pension, and they hold a Commonwealth Senior Health Card. The assessment of a person’s eligibility for the Age Pension and the CSHC card changed on that date, affecting people whose entitlements are based on the income test and not on the assets test.

Before January 1, 2015, a person’s entitlement for the Age Pension was assessed based on the person’s life expectancy. The life expectancy formula works out the deductible amount of a person’s superannuation pension. The deductible amount was calculated by dividing the pension’s purchase price less any commutations by the person’s average life expectancy determined by the Australian Government Actuary.

The deductible amount represents a return of the person’s superannuation contributions to fund their pension. This deductible amount is excluded from the person’s superannuation pension and the balance is counted towards their Age Pension income test. In some cases, the amount of their superannuation pension counted as nil due to the pension being less than the deductible amount.

From January 1, 2015, the life expectancy formula (the deductible amount) was replaced with new deeming rules. A deemed amount of income is calculated based on the person’s superannuation pension balance regardless of the investment income actually earned by the person’s pension assets. This means, a deemed level of income from their superannuation pension will be included in their Age Pension income test. Deeming does not recognise the return of their superannuation contributions and the level of pension drawn from the person’s superannuation pension account. Deeming assumes a certain rate of return on a person’s superannuation assets, rather than the actual earnings on pension assets.

Also, before January 1, 2015, a person’s superannuation pension was exempt from the CSHC income test. However, from that date superannuation pensions are included in the means test for the card in the same way as other financial investments such as shares and managed funds.

If super fund members cease or change their existing super pension on or after January 1, 2015, or their CSHC ceases, the new rules will affect them.

If any of the following events occur on or after that date, the member will lose the grandfathering provisions and the new deeming rule will apply:

● Rolling an existing pension to an accumulation account, combining other money to the accumulation account and re-starting a new pension from their SMSF.

● Ceasing to hold a CSHC. Retirees who spend more than 19 weeks outside Australia may have their card cancelled. They get the card back when they return home, but the exemptions on the grandfathering provisions will be lost.

● Converting a transition to retirement income stream to a retirement pension once the fund member has met a condition of release. Electing to reset the TRIS to an account-based retirement pension will result in the member’s grandfathering provision for income test ceasing.

Monica Rule is an SMSF specialist and author of The Self Managed Super Handbook — Superannuation Law for SMSFs in plain English.
www.monicarule.com.au