D-Day for pensioners is approaching
With important new deeming rules coming into effect on 1 January 2015, now is the time to review your superannuation and pension arrangements to ensure you don’t miss out on valuable Social Security entitlements.
Pension deeming after 1 January 2015 will change
Account based pensions have generally been given favourable treatment when Social Security assesses your eligibility for benefits such as the Age Pension and the Disability Support Pension.
As a result, many people with account-based pensions are currently able to receive valuable government support, topping up their own pension account payments to help their retirement savings last longer.
This is set to change from 1 January 2015, when new ‘deeming’ rules come into effect for account-based pensions making them subject to the same ‘deeming’ rules that currently apply to financial investments (exceptions apply). It is therefore important to review your Social Security entitlements now and make any changes well before 1 January 2015 as account based pensions commenced prior to this date for an income support recipient will not be subject to the new deeming rules (unless you move your balance to a new account based pension or the income support payment ceases from 1 January 2015).
Equally important is to assess whether setting up a new account based pension prior to this date would be beneficial for you.
How does ‘deeming’ work?
When Social Security assesses your eligibility for support payments, they assess you under the Assets Test and the Income Test, both of which you must satisfy before you can receive any benefits.
Under the Income Test, instead of asking you to declare how much income you’re actually earning from your financial investments, Social Security ‘deems’ that you are earning a certain percentage based on the level of assets you have.
The current deeming rates (effective 1 July 2014) are:
- 2%p.a. on investments up to $48,000 for a single (up to $79,600 for a pensioner couple)
- 3.5%p.a. on investments over $48,000 for a single (over $79,600 for a pensioner couple).
For example, if you commence your account-based pension after 1 January 2015, are single and have an account balance of $300,000 you would be deemed to earn $9,780 p.a. for the purpose of the Social Security Income Test (assuming no other financial investments, based on current deeming rates and thresholds).
What does this new ‘deeming rule’ change mean for you?
If you have an account based pension opened before 1 January 2015, your account will not be subject to deeming if:
- you receive Social Security income support payments immediately before 1 January 2015, and
- you continue to receive Social Security income support payments from 1 January 2015.
However, the new rules may affect you if you don’t meet either of these requirements, or if you move your balance to a new pension account from 1 January 2015.
If you haven’t yet opened an account-based pension, and you are currently eligible to do so (e.g. if you are aged 55 or over), there may be benefits in starting an account based pension and applying for Social Security income support payments (where eligible) before 1 January 2015.
Even if you don’t think you’re eligible for Social Security benefits, you may still be better off commencing an account-based pension sooner, as investment income generated in an account-based pension account is exempt from tax.
Act now to ensure you don’t miss out
If you are receiving a Social Security income support payment or may be eligible to receive one, it’s a good idea to review your circumstances now to ensure that you are best placed before the new deeming rules come into effect on 1 January 2015.