Centrelink & Account Based Pensions

Kim Guest

Senior Technical Manager FirstTech

Agenda

• Account based pension – income and asset test

• Reversionary v binding nomination

• Lump sum withdrawal vs increased pension payment

• First year is different….

• Rules of thumb

Age PensionCurrent statistics• 41% of age pensioners receive a part Age Pension• 32% are reduced due to the income test• 9% are reduced due to the assets test

• Income tested clients lose 50 cents of Age Pension for every dollar of account based pension payments over the deductible amount

• Asset tested clients lose $1.50pf for every $1,000 invested in an account based pension

Account based pension - Asset TestAsset Test = Account balance

When is the account balance determined?• If account based pension is paid once a year – 1 July

• If account based pension is paid more than once a year – twice a year at 1 July and 31 December

ReviewsAugust Review February Review

Applies to most clients Only applies to pensioners who are asset tested or within $10,000 of asset test

Account balance at 1 July Account balance at 31 Dec

Commutations Commutations

Annual payment

• Many large superannuation funds send data electronically

Strategy Tip

If the account value falls significantly clients can request a re-valuation of the account balance at any time.

Account based pension - Income test

Assessable Income = Annual payment – Deductible Amount

• Annual payment = sum of all payments received and expected to be received for current financial year.

• Deductible amount = (Purchase price – commutations) / relevant number

• Relevant number is the life expectancy of the owner at commencement or longest life expectancy of both beneficiaries if reversionary

Reversionary pensions• Reverts to the nominated beneficiary with no break in payment

• Only one beneficiary can be nominated

• Must be nominated at commencement and cannot be changed without commuting the pension

• Potential loss of anti-detriment payment

Centrelink assessment

• DA calculated at commencement using longest life expectancy – may be reduced if partner is female and/or younger

• DA continues unchanged when reverts

Binding nominations• Binds the trustee to pay to the spouse however may not bind the

form of benefit

• If paid as an income stream, it is not a continuation of the original income stream – may be break in payment

• More than one beneficiary can be nominated

• Nomination can be changed without commuting the pension

Centrelink assessment:

• DA based on primary clients life expectancy

• On death, new pension commences with a new DA

Taxation

• Draft TR 2011/D3 caused concern that once the person dies, the pension ceased. CGT implications

• Ruling stated that a reversionary pension or binding nomination specifying a pension is paid may cause a continuation of the pension

• MYEFO and subsequent exposure draft confirms tax exemption on assets supporting a pension will not cease as long as paid as soon as practicable

Case Study• John age 65 commences an account based pension for $500,000

on 1/7/2007

• If reversionary to wife Janice age 64, deductible uses longest life expectancy• John’s life expectancy 17.70*

• Janice’s life expectancy 22.00*

Deductible amount = $500,000 / 22.00 = $22,727

• At age 74, John passes away. As reversionary pension, Janice continues to receive deductible amount of $22,727

*2000-2002 life tables

Case Study• If John had used a binding nomination, deductible amount

based on John’s life expectancy

Deductible amount = $500,000 / 17.7 = $28,428

• When John dies, the deductible amount is recalculated

• Account balance on death $300,000

• Janice’s life expectancy 15.03

Deductible amount = $300,000 / 15.03 = $19,960

Assessable income over time….

Pension payment vs Commutation

Client requires more than minimum annual payment

Notify super fund of withdrawal type

before payment is made

Increased pension payment

Amount treated as income for the financial year. No

change to DA. Timing important

Amount withdrawn not treated as income for the financial year.

Permanent reduction of DA

Lump sum commutation

Case Study - Stan

• Stan commenced his account based pension 2 years ago

• Elects to receive $4,000 per month in pension payments

• Annual payment = $4,000 x 12 = $48,000

• Assessable income = $48,000 - $25,350 = $22,650

• Stan needs an additional $20,000 to buy a car

Case Study - Stan

1 July 30 June

Annual payment = $4,000 x 12 = $48,000

$48,000 - $25,350 = $22,650

Case Study - Stan

1 July 30 June

Assessable increases from $22,650 to $42,650 from August

Age Pension significantly reduced for remainder of financial year

Extra $20,000

in August

Case Study - Stan

1 July 30 June

Assessable increases from $22,650 to $42,650 for June only

Extra $20,000 in June

Strategy Tip

Increased pension payment in last 14 days of financial year and notify Centrelink at the same time as providing a new income stream schedule for the following financial year – increased pension is effectively ignored

First year is different….

To calculate the annual payment in the first year:

(Sum of all payments received and to be received) x

(Number of days in financial year

Number of days from commencement until 30 June)

Case Study – Identical monthly payments

• Peter elects to receive $4,000 per month and commences a pension on 1 January

• Annualised payment is:

($4,000 x 6) x (365/181) = $48,397.79

• If Peter had received $4,000 per month for a full financial year the result would be $48,000 so its close to the expected result

Case Study - Large pension payment

• George age 65, commences an account based pension with a purchase price of $470,000

• George wants to draw a single annual payment of $48,000

• If George commences pension on 1 April, annualised payment is:

$48,000 x (365 / 91) = $192,527

• If George commences pension in 1 August, the annualised payment is:

$48,000 x (365 / 334 ) = $52,455

Alternatives

• Starting the pension earlier in the year

• Starting the pension with a smaller purchase price and retaining the required funds in a bank account

• Taking a higher pension payment in the next financial year

• Making a lump sum withdrawal

Lump sum withdrawal• Not counted as income

• Permanently reduces deductible amount

Deductible amount = (Purchase price – commutations)

Relevant number

• May not reduce pension much initially but cumulative effect may be worse than choosing an increased pension

Case Study - Comparison

• Russell is 65, retired and eligible for the Age Pension

• Deemed financial investments $103,000

• Commences an account based pension with $300,000

• Requires an annual pension payment of $40,000 to meet retirement income needs

Deductible amount = ($300,000/18.54) = $16,181

OptionsOption 1• Draw regular pension payment of $40,000

Centrelink treatment:• Pension payment in excess of DA assessed as income, $23,819p.a.

• Age pension reduces by $11,909 in current year

Option 2• Draw regular pension

equal to DA $16,181

• Lump sum withdrawal $23,819

Centrelink treatment: • No assessable income

• Lump sum withdrawal permanently reduces DA from $16,181 to $14,896

Option 3• Draw regular pension

equal to DA $16,181

• Irregular pension payment $23,819 in mid June

Centrelink treatment:

• No assessable income

• Irregular pension payment taken in the last 14 days of the FY will not affect Age Pension

Case Study - ComparisonWhat is the payoff period?

• Under option 1, Russell loses $11,910 in one year

• Under option 2, he loses $642.50pa

• Assuming Russell remains income tested, it takes his life expectancy of 18.5 years for option 2 to result in the same reduction as option 1

• But what if Russell lives 30 years....$19,275 reduction

Rules of thumbLevel of income or assets

Increased pension payment

Lump sum withdrawal

Asset tested No impact No impact although permanently reduces

DA if becomes income tested later

Income tested Reduces age pension – timing important

Permanently reduces DA

What about starting a new pension?

• Deductible amount may be increased if commute the income stream entirely following the lump sum withdrawal and re-commence.

• May be effective if income stream experienced significant market growth since commencement.

• Life expectancy reduced which increases deductible amount

Case Study – Remember Russell….• Lump sum withdrawal permanently reduced his DA from

$16,181 to $14,896

• If account balance is now $350,000 and Russell is now age 68, new deductible amount is:

$350,000 / 16.24 = $21,551

• But what if account balance had fallen to $200,000, new deductible amount is:

$200,000 / 16.24 = $12,315

Conclusions• Need to way up increased pension payment v lump sum

commutations• Increased pension payment in last couple of weeks of

financial year can work• Be careful in the first year of the pension, avoid drawing

large pension payments, particularly if starting late in year

• If making a lump sum withdrawal, consider commuting and starting a new pension

This presentation is given by a representative of Colonial First State Investments Limited AFS Licence 232468, ABN 98 002 348 352 (Colonial First State). Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) is the issuer of interests in FirstChoice Personal Super, FirstChoice Wholesale Personal Super, FirstChoice Pension, FirstChoice Wholesale Pension and FirstChoice Employer Super from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557 and interests in the Rollover & Superannuation Fund and the Personal Pension Plan from the Colonial First State Rollover & Superannuation Fund ABN 88 854 638 840 and interests in the Colonial First State Pooled Superannuation Trust ABN 51 982 884 624.

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