1 Oct 2014 | Pension
With the Centrelink income test changing from January 1, 2015 for account based pensions many people have recognised the value, if they are currently receiving or are entitled to the Age pension, of starting an account based pension before December 31, 2014. The problem is not everybody will be better off under the old test, and some could be worse off when their account based pension is reversionary.
Under the income test rules when an account based pension is a reversionary pension, payable to the spouse of a deceased member, the life expectancy relevant number used is that of the youngest of either the member or the reversionary pensioner. This means when a spouse is significantly younger than the member the deductible purchase price can be significantly lower.
Members that find themselves in this situation should consider not making their account based pension reversionary. Although a reversionary pension does make it easier for the pension stream to continue when the member dies, there is not a great deal of work required if the pension is non-reversionary.
In this instance the surviving spouse can receive a death benefit pension. This is done upon the death of the member by the trustees deciding to pay the death benefit to the spouse in the form of an account based pension. The timing of the death benefit pension coincides with the date of death of the member. This effectively there is no interruption in the pension being paid, just as would be the case if it had been a reversionary pension.
Locking in the current Centrelink income test with regard to account based pensions works until a member needs to increase the pension they receive. In this situation, even after taking into account the deductible price of the account based pension, a higher amount of account based pension income will be counted than would be the case under the deeming rules.
This problem would also occur when a member gets older and is required to take a higher amount as the minimum pension payment.
This is one of the few times where a member can have their cake and eat it too. There is nothing stopping a member commencing an account based pension before January 1, 2015, thus locking in the more favourable current income test, and when they are disadvantaged under the current rules cease that account based pension then.
After ceasing the original account based pension they could start a new one that would then be treated under the new rules commencing on January 1, 2015. This would result in a member receiving a higher amount of Age pension, because the deemed income would be less than the higher account based pension they needed to receive.