Change to the deeming rules 3 years ago, that extended deeming rules to superannuation pensions, can potentially have financially devastating effects on the Age Pension entitlements of current and future retirees. Although the government’s Age Pension assets test changes (which took effect from 1 January 2017) are likely to hit part Age Pensioners even harder than the January 2015 measure to the Age Pension income test. (For details on changes to the assets test see SuperGuide article Less Age Pension, and paid to fewer Australians since January 2017, or see links at the end of the article you are currently reading).
Background: In late November 2013, the coalition government introduced legislation into parliament that changed the deeming rules for the Age Pension income test. The changes became law on 31 March 2014, and took effect from 1 January 2015.
In simple terms, the end result of the relatively recent change to the Age Pension income test means that superannuation pension assets held by retirees will be double-counted when being assessed for the Age Pension asset test. Now, in my opinion, that doesn’t sound very fair. Note that existing Age Pensioners, as at 31 December 2014, are not subject to the new income test unless they lose the Age Pension and then re-apply for the Age Pension at a later date, or commence a super pension, or change super pension products on or after 1 January 2015.
Historically, the reason superannuation pensions were treated differently in terms of the Age Pension income test was, firstly, to recognise that any payment from a super pension included a capital component which was already assessed under the Age Pension assets test. The second reason for excluding super pensions from the deeming rules, and allowing a deductible amount, was to encourage Australians to take superannuation pensions rather than opting for lump sums and spending the money.
The anticipated savings of this change, projected for the Liberal government, indicate that it will hurt affected retirees a lot more than it will benefit the Government’s bottom line. According to the federal government, extending the Age Pension income test deeming rules to include super pensions will save the federal government $162 million over 4 years (that is, $40 million a year).
Who is affected by the new Age Pension income test rules?
The change to the Age Pension deeming rules, which took effect from 1 January 2015, was thought up by the previous ALP federal government, but inspired by the Henry Tax Review. On 5 April 2013, the former ALP federal government announced that it proposed to extend the deeming rules for Age Pension income test, so that the deeming rules apply to new superannuation pensions, from 1 January 2015.
Important: All superannuation pension products (including SMSF pensions) held by pensioners before 1 January 2015 are grandfathered indefinitely and continue to be assessed under the previous rules for the life of the product so no current pensioner is affected, unless they choose to change superannuation pension products. Superannuation pensions in place before 1 January 2015 continue to be assessed under the previous Age Pension income test rules for super pensions. See later in the article for an explanation of the previous rules that still apply to most existing Age Pensioners (if they were an Age Pensioner as at 31 December 2014), or refer to SuperGuide article Age Pension: Deduction amount still applies for income test, sometimes.
How does deeming work?
Under the Age Pension rules applicable before January 2015 (and also applicable to current Age Pensioners who are eligible to be treated under the old rules), if you own financial investments, such as shares and term deposits, and you plan to claim the Age Pension, then you need to be aware that the ‘income’ counted for the financial assets you own, under the Age Pension income test is not the actual income earned on those investments. The income counted from financial investments when working out your eligibility for the Age Pension, is known as deemed income. Deemed income is when you assume a rate of return even when that rate isn’t necessarily what you actually earn on your investment.
The current deeming rates (effective since 20 March 2015) applicable to financial investments are 1.75% up to a certain value of financial investments, and then 3.25% for any financial investments above the lower value threshold. The deeming rates, asset value thresholds, and how they all work are explained in the SuperGuide article Age Pension income test: Deeming rates and deeming thresholds.
Note: Effective since 1 January 2015, for new account-based superannuation pensions started on or after that date, the deeming rates will be applied to these super pensions when assessing a person’s eligibility against the Age Pension income test.
How are super pensions assessed for Age Pension eligibility under the grandfathered (old) rules?
Eligible superannuation pensions (generally those super pensions in place before 1 January 2015 and the pension recipient was also receiving the Age Pension before January 2015) are counted against the Age Pension income test through a special calculation that recognises the return of capital that forms part of every super pension payment. Note that the account balance of the super pension is also counted against the Age Pension assets test.
Age Pension income test: If you started taking an income stream from your super fund before January 2015 and you were also receiving the Age Pension before January 2015, for the purposes of the income test, the income that is counted is generally the pension payments received for the year less a deduction amount. The deduction amount calculation represents a return of capital so the account balance isn’t double counted in both the income and assets tests. You can find more information on how grandfathered superannuation income streams/pensions are assessed for the Centrelink income test on the Department of Human Services website, by visiting the ‘income’ page, although the revamped DHS website is a bit light on in relation to information about how superannuation pensions are treated when claiming the Age Pension.
Age Pension assets test: If you are running an older allocated pension, or the newer account-based pension, then all of the account balance counts towards the assets test. If you have an older complying pension or term allocated pension, then you may not have to count any of your pension assets as part of the asset test, or perhaps only half of the assets.
Below is a diagram from the Department of Treasury, explaining the grandfathered (old) treatment of income and assets for the Age Pension.
Chart 6.1: The [grandfathered] means test for the Age Pension
a. Superannuation accumulations (not being drawn down through an income stream) are treated as financial assets.
Source: Australia’s Future Tax System Review (more commonly known as the ‘Henry Tax Review’).
How does the revised Age Pension income test affect retirees?
Clearly, the changes to the Age Pension income test, by extending deeming to superannuation pensions, has caused a lot of anxiety for future retirees because it means less Age Pension for the same amount of assets as before the change. One of our SuperGuide readers, Kym, did some calculations (note these calculations were done about 2 years ago before the extended drop in interest rates) and this is what Kym had to say:
To me, the big sleeper for average retirees in the future is the change in the application of the deeming rules to superannuation income streams for age pension income test purposes. By my calculations, if a couple had a super fund balance of $273,000 and no other assets (by no means fabulously wealthy!), they would currently be entitled to a full age pension under the assets test, and in most circumstances would also be entitled to the full age pension under the income test.
But under the new regime (applicable to pensions commenced after 2015), the super account would have deemed annual income of $10,231.50, which would reduce the age pension by about $62 per fortnight. And in the highly foreseeable event that the deeming rate increased to, say, 6% pa, their age pension would be reduced by a further $105 per fortnight. Surely there will be mass outrage when people finally start to cotton on to the Government’s deception (I can’t for a moment believe that Treasury has not already modelled this!)
I believe this change to the deeming rules has had devastating effects on the retirement plans of many older Australians.
A summary: January 2015 deeming changes
In the meantime, here is a potted summary of how superannuation pensions are affected by the Age Pension income test since 1 January 2015:
- Individuals already receiving the Age Pension as at 1 January 2015, continue to be tested under the previous rules, that is, pension income is adjusted by a deductible amount before including ‘income’ for the purposes of the Age Pension income test
- If an individual changes his or her superannuation pension product on or after 1 January 2015, then the income from the new pension is subject to deeming rules rather than the previous income treatment.
- If an individual commutes his superannuation pension on or after 1 January 2015, then the previous income test rules cease to apply, and the deeming rules apply instead.
- If you were not receiving the Age Pension as at 1 January 2015, then your super pension is subject to the new deeming rules.
- According to the explanatory memorandum, the extension of the deeming rules applies to “any asset-tested income stream (long term) that is an account-based pension, or an equivalent annuity product.
For those interested in the legal changes, you can read the new Act that introduces the extension of the deeming rules – click on Social Services and Other Legislation Amendment Act 2014.
For those readers interested in the changes to the Age Pension income test for Australians receiving defined benefit pensions (typically retired public servants and some retired employees of large companies), see SuperGuide article Super alert! Age Pension income test change hits funded defined benefit pensions.
For more information on how the Age Pension rules operate, see the following SuperGuide articles:
- Australian Age Pension: 10 important facts you should know
- Age Pension changes: More Australians entitled to payments since September 2018
- Latest Age Pension rates (since September 2018)
- Australian Age Pension: Am I eligible and how do I apply?
- Age Pension: Income test thresholds applicable since September 2018
- Age Pension income test: Deeming rates and deeming thresholds
- Age Pension: Are you eligible for the Work Bonus?
- Age Pension income test change hits funded defined benefit pensions
- Retirementgate: Government’s Age Pension debacle hits middle Australia
- Age Pension: Assets test thresholds applicable since September 2018
- Less Age Pension, and paid to fewer Australians since January 2017
- Age Pension: Dramatic changes over past 10 years