Age pension: Keeping your super pension grandfathered
- Account-based pensions came under the Income Test ‘deeming’ rules on 1 January 2015
- ‘Grandfathering’ allows pre-existing pension accounts to stay under the old rules
- We explain how to ensure grandfathering isn’t lost (forever)
In Super and the age pension: How the tests work we explained the age pension’s Income TestOne of the two tests that determine eligibility for the Age Pension (the other is the Assets Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Income Test calculations and limits can be found at the Department of Human Services website. and the differences before and after 1 January 2015. The rising interest rate scenario highlighted the potential impact of coming under the new rules.
If you’re collecting the age pension, other ‘income support payments’ or Commonwealth Seniors Health Card and you’re Income Tested under the old ‘deductible amount’ approach, staying that way could save you a lot of money in the long run.
Not everyone will benefit from the old approach. If you’ve been collecting a super pension that’s far higher than the minimum withdrawal you might get a better Income TestOne of the two tests that determine eligibility for the Age Pension (the other is the Assets Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Income Test calculations and limits can be found at the Department of Human Services website. result under the new rules.
The new test deems you to earn a certain amount on your super account rather than looking at what you actually receive. That’s bad for those receiving a small super pension, but good if you’re collecting a large one.
If you’re grandfathered and you’d prefer to be treated under the new rules, the simple solution is to reset (stop and start) your super pension (although always seek personal advice first). That ends your grandfathering and puts you into the new regime.
Most people will be better off staying grandfathered and using the old ‘deductible amount’ approach. We’ll look at the pitfalls to avoid in order to achieve this, but first let’s remind ourselves of one important point.
What if I’m Asset Tested?
For many, the Asset Test is currently the ‘dominant test’ – the test that gives the worst result and determines the age pension outcome. But that’s a function of our current low interest rate environment.
Even if you’re currently ‘Asset Tested’ you’ll still be grandfathered for the Income TestOne of the two tests that determine eligibility for the Age Pension (the other is the Assets Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Income Test calculations and limits can be found at the Department of Human Services website. (assuming you qualified). It may not be important now but as interest rates rise and the Income TestOne of the two tests that determine eligibility for the Age Pension (the other is the Assets Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Income Test calculations and limits can be found at the Department of Human Services website. again becomes the dominant test for many people, using the ‘deductible amount’ approach and not being deemed may give you a higher age pension.
How do you make sure you stay grandfathered?
The test for grandfathering
The rules say that you must have been in receipt of an income support payment (age pension or certain other Centrelink entitlements) and an account-based pension (ABP), or certain annuities, immediately prior to 1 January 2015.
But it’s only the ABP you had at that time that’s actually grandfathered – if you cease or change it, you’ll lose it – and you must have been receiving the age pension or other income support payment continuously since that date.
What might cause you to fail these tests?
Pitfalls to avoid
The events that might cost you your grandfathered status can be divided into two broad categories: mistakes and changes. Mistakes are easily avoided but change – for instance, your super fund being shut down – is a different story (although we’ve made some suggestions below).
What are the mistakes you need to avoid making?
Breaching the rules
It’s not 100 per cent certain that breaching the super pension rules will cause a loss of grandfathering, but at this stage it’s best to assume it will.
The breach could be a failure to take the minimum pension or something more obscure. So make sure your super pension has been set up properly and that you keep making the minimum withdrawals (or, in the case of TTR pensions, don’t exceed the 10 per cent cap).
Stopping your age pension (or other Centrelink benefit)
To qualify for the grandfathering you must have been receiving the age pension or other ‘income support payment’ prior to 1 January 2015 and continuously since then. If you stop receiving an income support payment you come under the new rules.
This makes it critical you avoid letting your age pension (or other payment) lapse. So be careful if you’re leaving Australia for more than six weeks (as this could trigger a short-term loss of entitlement and could end your grandfathering). Seek Centrelink advice before booking an extended South American cruise.
If you work part-time, don’t forget to give Centrelink the fortnightly update of your income. If you’re close to a ‘cut-off’ threshold for the Assets TestOne of the two tests that determine eligibility for the Age Pension (the other is the Income Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Assets Test calculations and limits can be found at the Department of Human Services website., be very careful when updating Centrelink about values and do what you can to stay underneath the thresholds.
We suspect a lot of people will be caught out on short-term events and technicalities, so pay close attention to avoid being one of them.
Switching from TTR to ABP
If you’re on a transition to retirement (TTR) pension and become eligible to start an account-based pension (ABP), you (or your accountant) may make the switch as a matter of course. Don’t proceed to do this until you’ve checked your pension agreement first.
Some pension agreements are drafted with an ‘automatic switch’ clause, where the act of moving from a TTR to ABP is simply a matter of the trustees noting that the restrictions on lump sum withdrawals and the maximum withdrawal of 10 per cent have ceased. However, it’s important to note that many TTR pension agreements were drafted as ‘stand alone’ pensions that need to be replaced by a new pension agreement to move to an ABP. This would cost you your grandfathering.
Unfortunately, you can’t just change the terms of a TTR pension to turn it into one that automatically switches – making that change would see you lose your grandfathering entitlement anyway. In this case, you’re faced with the choice between switching and losing your age pension grandfathering or staying on a TTR pension.
The good news is if you don’t need to make a large withdrawal, there’s no downside to staying on a TTR pension under the current rules. TTR pensions are taxed the same as ABPs and the super fund is exempt from tax in either case.
If you need to withdraw more than 10 per cent a year from your super, you’ll need to weigh up the benefit of being able to do so versus the potential loss of age pension from being deemed on your ABP. Fortunately, if you’re making a large super withdrawal, the impact becomes smaller.
Resetting, re-contributing or consolidating your super pension
In the past, it’s been common practice to periodically ‘reset’ pensions where the member is still making contributions to an accumulation account. This maximised the tax benefits for the fund, potentially increased the ‘deductible amount’ under the old rules and generally tidied things up. ’Re-contribution’ strategies (where the pension account balance is withdrawn, re-contributed to an accumulation account and a new pension commenced) have also been popular.
The act of ceasing a super pension will now cost it the grandfathered status. So going forward you shouldn’t do a reset, re-contribution or consolidation unless the benefits of doing so outweigh the long-term cost (to your age pension) of becoming deemed on your pension account balance.
We suspect some SMSF members will lose out due to an accountant resetting their pension as part of the paper gathering process without being aware of the consequences. Make sure you aren’t one of them.
If you’re a member of an external super fund you may be tempted to switch products. But make sure you understand whether you’re switching funds or simply changing investment options.
You should be safe if you stay in the same fund (although be sure to check exactly what’s happening) but if you change funds (even if, for instance, they’re both managed by AMP), you’ll cease one pension and start another – and you’ll say goodbye to your grandfathering.
Adding a reversionary beneficiaryThe person nominated to continue receiving a member's super pension after their death. A reversionary beneficiary must be a 'pension dependant', which means a spouse, a child under 18 (or 18-25 and financially dependant), a person living in an 'inter-dependency relationship' with the deceased, or a person who is financially dependant on the deceased. or other changes
We’re advocates of using reversionary pensions. However, if you didn’t have one in place on 1 January 2015 you can’t add one now without losing your grandfathering, as it’s considered a change.
If you’re in this position, you’ll need to weigh up the benefits of using a reversionary pension against being deemed on your super account.
Shutting down your SMSF
Winding up an SMSF will also see your old pension stop. It’s not something that would happen inadvertently, but there are two scenarios where closing your SMSF may be forced upon you.
Firstly, if you commit a serious breach of your duties as trustee, the ATO may force you to wind up your SMSF and transfer the balance to an external fund.
Secondly, there are situations where the accountant or administrator has messed up the administration. Anecdotally, we’ve heard of cases where an incoming administrator has recommended the fund be closed and a new one started because the historical records are inadequate or unavailable.
Discounted online administrators save money by eliminating human oversight and putting the burden of checking facts and figures back on you. There’s no problem with that per se, but make sure you’re aware of your responsibilities.
Accountants aren’t all cut from the same cloth so if you’re getting a cheap deal, make sure it’s not because yours isn’t up to scratch. It’s not your accountant who will end up with a non-complying fund, trustee penalties or lost age pension, it’s you.
These are the major mistakes you need to avoid. But there are other events that might see you lose your grandfathering and there’s not much you can do to avoid them.
Fund closures or mergers
Barring unforeseen mishaps, it’s you as a trustee who ultimately controls whether your SMSF is shut down. But if you’re a member of a retail or industry fund, the fund manager will make that decision for you.
Institutions don’t like maintaining dwindling legacy products as they’re typically less profitable and systems upgrades often don’t adequately complement them. If you’re a member of an old super fund, you’re exposed to the manager deciding they want to shut it down or merge it with one of their more recent funds.
Check the annual report for your fund and see if the funds under management and member numbers are growing or shrinking. If your fund is withering away, proactively contact your manager and press them on a long-term solution that doesn’t cost you age pension entitlements.
Change of law
If a change in law affects your current pension, you may be forced to shut it down or stick with the consequences of the law change. For example, this may happen if you’ve chosen to stick with a TTR pension with no automatic move to ABP on meeting a general condition of release (that’s because you’d need to start a new pension to switch to an ABP).
Let’s say the Government decided to start taxing TTRs. You’d either have to pay this tax or start an ABP and lose some age pension.
Unless you had a reversionary beneficiaryThe person nominated to continue receiving a member's super pension after their death. A reversionary beneficiary must be a 'pension dependant', which means a spouse, a child under 18 (or 18-25 and financially dependant), a person living in an 'inter-dependency relationship' with the deceased, or a person who is financially dependant on the deceased. in place at 1 January, death of the pension recipient will mean the super balance ends up being deemed if it passes to a remaining spouse. If your spouse is the reversionary beneficiaryThe person nominated to continue receiving a member's super pension after their death. A reversionary beneficiary must be a 'pension dependant', which means a spouse, a child under 18 (or 18-25 and financially dependant), a person living in an 'inter-dependency relationship' with the deceased, or a person who is financially dependant on the deceased. and they were collecting the age pension (or another entitlement) at 1 January 2015, the grandfathered status continues.
Divorce or separation leads to a property settlement which often involves splitting super. If you’re in this scenario make sure you take the effect on your age pension entitlement into account.
We’re not suggesting sticking with it to keep your age pension intact, but see if it’s possible to divide the overall assets and keep your super pension intact. If not, be sure to take the potential loss of age pension into account.
If in future you’re potentially affected by external events, we suggest you complain to your local member of the legislative assembly (MLA) and try to push the government of the day to make the rules more equitable. In the event of a fund closure or merger, pressure the institution involved to support your cause. The more people unfairly affected by an adverse change, the more likely the politicians of the day will listen.
If you’re concerned about a scenario we haven’t discussed above, please let us know via the Q&A function.
Liam Shorte is a principal of Verante Financial Planning Pty Ltd (www.verante.com.au), a corporate authorised representative of Magnitude Group Pty Ltd (AFSL 221557). This article is a general information article and to the extent it contains any financial advice it is general advice only. We recommend seeking personal advice on your own circumstances.
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