The federal government announced and legislated changes to the Age Pension income test, which have been law since 1 January 2016, for those Australians (retired public servants and retired employees of some large companies) who receive funded defined benefit superannuation pensions. Unfunded defined benefit pensions are not affected by the change, since they are already fully assessed for Centrelink purposes.
Announced in the 2015 Federal Budget, and effective since 1 January 2016, the level of income received from a funded defined benefit super pension, and that can be excluded from the Age Pension income test, will be capped at 10%.
In other words, if a defined benefit pension has a deductible amount (currently not counted towards Age Pension income test), then since 1 January 2016, the amount that can be excluded (deductible amount) can be no more than 10% of the gross amount payable from the defined benefit pension for the year. The change is designed to neutralise some of the advantages of the deductible amount, which is excluded from the Age Pension income test.
With so many recent changes affecting the Age Pension (such as deeming income for new super pensions and/or for new Age Pensioners since January 2015, and a stricter assets test since 1 January 2017), this significant change to the Age Pension income test has gone largely unnoticed except by the thousands of retired public servants and former large company employees hit by the change.
Note: Veterans’ Affairs pensions and military defined benefit income streams will not be affected by this change to the Age Pension income test.
How many retirees are affected?
According to the federal government, around 140,000 income support recipients (mainly Age Pension recipients) also have a funded defined benefit income stream. Income stream is another word for pension. Around 55% of these 140,000 income support recipients, don’t have a deductible amount, so the change, which took effect since 1 January 2016 does not affect this segment of the group. Another 10% of these 140,000 income support recipients have a deductible amount on their defined benefit pension of less than 10% of the gross amount payable.
Based on federal government figures, this measure affects 35% of the 140,000 or so income support recipients who also have a funded defined benefit income stream. Roughly speaking, of the 49,000 or so Australians affected by this change, around 20% (around 9,800) receive a defined benefit pension from a federal government super scheme, around 75% (around 37,000) receive such a pension from a state or local government scheme, and around 5% (2,450) receive a funded defined benefit pension as part of a private company defined benefit super fund.
Why did the government introduce this stricter treatment for DB pensions?
According to the explanatory memorandum accompanying the legislation, the measure will ensure that a fairer proportion of a superannuant’s actual defined benefit income is taken into account when applying the social security income test.
Quoting directly from the EM: “From 1 January 2016, the deductible amount (that is, the amount that can be excluded from the income test) for a defined benefit income stream, excluding military defined benefit schemes, will be capped at a maximum 10 per cent of the gross amount payable to an individual for the year.
“This will result in an increase to [ordinary income, when determining eligibility for income support payments], for people with a deductible amount currently greater than 10 per cent, for the purpose of determining the rate of income support the person receives.”
How this new rule works in practice?
In a 2015 Federal Budget media release issued by the then Minister of Social Services, Scott Morrison, he cites an example explaining how this change will work: A couple with a defined benefit pension of $120,000 a year and with a 50% deductible amount, could previously exclude $60,000 income from the Age Pension income test, which means the couple, at the time, received a part Age Pension of $7,400 a year. Under the new measure, which took effect since 1 January 2016, only 10% of the $120,000 can be capped, which means $108,000 is counted against the Age Pension income test, and accordingly no part Age Pension is paid. Australians receiving funded defined benefit super pensions from military super schemes, or receiving DVA pensions, are not affected by this harsher test.
Important: Several readers have asked the following question: “If I lose my Age Pension entitlements due to the defined benefit pension income test change, will I be automatically entitled to a Commonwealth Seniors Health Card, like the Australians who lose Age Pension entitlements due to the stricter changes to the Age Pension assets test?” The answer is no. You will have to satisfy the eligibility rules to be entitled to the CSHC. For more information on the CSHC, see SuperGuide article Are you eligible for a Commonwealth Seniors Health Card?
For more information on the Age Pension, including other Age Pension changes see following SuperGuide articles:
- Income test changes (January 2015) mean less Age Pension
- Age Pension: 330,000 Australians lose entitlements since January 2017
- Age Pension: September 2017 rates apply (until March 2018)
- How do I apply for the Australian Age Pension?
- Age Pension: Income test thresholds applicable from September 2017
- Age Pension: Assets test thresholds applicable from September 2017
- Age Pension income test: Deeming rates and deeming thresholds