Is it time to review your Account Based Pension?
By Mark Teale
On the 1st of January 2015, the age pension assessment of account-based pensions changed. Assessment of account-based pensions was brought in line with other “financial Investments”.
What does this mean?
The balance of the account-based pension, regardless of the income being drawn down, was assessed in the same way as money invested in bank accounts, shares, and managed investments. Income was calculated by deeming an interest rate of either 1.75% or 3.25% – the rate depends on the balance of your other financial assets.
For retirees in receipt of age pension at the time, this new method of assessing account-based pension income could have resulted in a reduction in their age pension. To ensure retirees were not disadvantaged the previous method of assessing account-based pension income was “grandfathered”.
This “grandfathered” assessment was based on the following;
- The amount of capital used to commence the pension is divided by the life expectancy of the pension recipient (or the longer of the two pension recipient’s life expectancies, where a reversionary pensioner is nominated). The resultant amount is referred to as the “deductible amount”. This amount remains constant for the life of the account-based pension unless a lump sum withdrawal is made from the pension account, at which time the deductible amount is recalculated.
- The amount of the account-based pension income currently assessed under the “grandfathered” income test is the actual income drawn from the account-based pension, minus the deductible amount. Providing a person did not roll their account-based pension to a new provider the old assessment was retained. However, like all good investments and strategies in retirement – regardless of legislative change – they should never be viewed as a set and forget position considering, the original investment was probably made at the age of 65, which for someone in their 80’s is close to, if not over 20 years ago.
All investments and strategies should be reviewed on a regular basis. Account-based pensions are not an exception. The first important point to consider when you are reviewing your account-based pension – as a pensioner ages the amount of income that is required under legislation to be drawn from your ABP increases, meaning that a person rather than being disadvantaged by the new rules could, in fact, be better off being assessed under the new legislation.
The second salient point concerning the income being drawn from an account-based pension occurs when a pensioner enters aged care and they need to draw more income from the account-based pension to cover their fees.
The following example may make it a little easier to understand;
At the age of 65, a single gentleman invested $300,000 into an account-based pension and was drawing an amount of $15,000 as income on an annual basis. At the time of this investment, his life expectancy was 15.41 years, meaning $19,467 ($300,000 divided by 15.41) was assessed as his “deductible amount”. So, providing he did not draw a yearly pension in excess of this “deductible amount” his age pension was not affected by the application of the income test.
This gentleman is now 85 years of age and has entered residential aged care. To assist in paying his aged care fees he is now drawing $30,000 per annum from his account-based pension which means an amount of $10,533 per annum ($30,000 – $19,467) is being assessed as income for the purpose of calculating his age pension and his aged care fees.
If this gentleman were to roll his account-based pension which is now only $250,000 to a new provider, the pension would now be assessed under the new legislation. In other words deemed at the interest rates mentioned earlier in the article and only $7,357 per annum would be assessed as income. This would mean his age pension would increase slightly, and his aged care fees would reduce by a small amount.
I do understand that it does sound very complicated. However, the very point of this blog and the examples shown demonstrate that as your circumstances change you do need to review your position to ensure you are not being disadvantaged. The best person to discuss your pension assessment with is not your neighbor or a relative, it is a financial planning expert who understands legislation and has the necessary experience to point you in the right direction.
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