Do you need to protect a ‘grandfathered’ account-based pension?
By Colin Lewis, Head of Technical Services, Fitzpatricks Private Wealth
Have you got what is known as a ‘grandfathered’ account-based pension (ABP) for social security/Department of Veterans’ Affairs (DVA) purposes and feel trapped because you’re locked-in and cannot change it?
Maybe you’re wanting to switch super funds – even start or wind-up a self-managed super fund (SMSF) – or convert a non-reversionary ABP into a reversionary one for estate planning and transfer balance cap reasons, or wishing to simplify your affairs by combining several ABPs but fear you can’t because doing so will mean losing government benefits from changing your ‘grandfathered’ ABP.
But is this necessarily the case?
People receiving government income support payments, e.g. Age or Service Pension, or Disability Support Pension, know their financial assets are means tested to determine eligibility and the amount of their benefits. They are counted under the assets test and ‘deemed’ under the income test.
Deeming assumes the market value of your financial assets earn a government-set rate of return to work out the income they create, no matter what they really earn.
Financial assets include savings accounts and term deposits, shares and managed funds, gifts made above certain thresholds, superannuation in accumulation phase from age or service pension age, and some income streams, including ABPs.
So, the balance of an ABP, including a transition to retirement pension, is counted under the assets test and deemed under the income test for social security/DVA purposes.
For self-funded retirees, a Commonwealth Seniors Health Card (CSHC) provides cheaper medicine under the Pharmaceutical Benefits Scheme. Other concessions are not as extensive as those for Pensioner Concession Card holders. However, State and Territory governments and local councils may provide concessions, such as lower council rates, public transport fares and health care costs, including ambulance, dental and eye care, and cheaper electricity and gas bills, but these vary greatly depending on where you live.
The CSHC is income tested only with ABPs again being deemed. There is no assets test.
What is a ‘grandfathered’ ABP?
If you have an ABP that was established before 1 January 2015 and you received and continue to receive income support payments – or held and continue to hold the CSHC – immediately before that date, then the income test applying on 31 December 2014 continues to be used. That is, the old income test rules apply to these ABPs instead of them being deemed – they are ‘grandfathered’.
For income support payments, a non-assessable portion (deductible amount) offsets the ABP payments, reducing the amount counted. For the CSHC, no income whatsoever from the ABP counts towards the card’s income test.
‘Grandfathering’ also applies to reversionary pensions where the original ABP member satisfies the above conditions until their death and the reversionary beneficiary receives and continues to receive income support payments – or holds and continues to hold the CSHC – from the date the pension reverts, i.e. the time they start receiving the deceased’s pension.
For many with ‘grandfathered’ ABPs, there is still confusion as to what can and cannot happen so as not to lose this status.
The continued ‘grandfathering’ of an ABP is a two-limb test. First, you must maintain the ‘grandfathered’ ABP, however, you may reduce its balance via partial commutations, i.e. lump sum withdrawals. Second, you cannot lose government income support payments – or the CSHC – even if you later re-qualify. If either occurs, ‘grandfathering’ is lost.
There are many ways this can happen. Most centre on making changes to the ABP, either deliberately or accidentally, without being aware of the implications.
If you stop a ‘grandfathered’ ABP and start a new pension, say to add extra savings or to aggregate multiple ABPs, or to include a reversionary nomination for estate planning purposes, you lose the ‘grandfathering’ and your new ABP is deemed.
Changing income stream providers is another way. That is, moving your ABP from one super fund to another, including moving from an SMSF to a retail or industry fund. However, people who have a ‘grandfathered’ ABP and no longer wish to run their SMSF but are locked in due to their CSHC may find a small APRA fund the solution. Handing control to a professional trustee does not change the fund or the ‘grandfathering’ of an ABP (nor trigger capital gains tax on fund assets).
The ‘grandfathered’ treatment of an ABP is also lost if a death benefit pension is paid to someone other than a reversionary beneficiary, or the minimum pension payment requirements are not met and the ABP ceases. In all these cases, the account balance of the new pension is deemed.
Circumstances where the CSHC is lost and consequently ‘grandfathering’ of an ABP is lost, includes where the income threshold for the card is exceeded – currently $55,808 a year for singles, $89,290 a year for couples and $111,616 a year for couples separated by illness.
The CSHC can also be lost by going overseas for more than 19 weeks, which requires a card re-application on return and sees the ABP balance being deemed.
Does losing ‘grandfathering’ on an ABP mean losing government benefits?
No, not necessarily – losing a ‘grandfathered’ ABP may not be the end of the world.
Low deeming rates have helped – and with the potential for interest rates to go lower, deeming rates could reduce further.
For income support payments, e.g. Age Pension, where you’ve made withdrawals from your ABP in addition to your regular pension payments, the deemed income from a new ABP may now be lower than the ‘grandfathered’ assessable amount meaning your benefits could increase by changing ABPs.
Losing ‘grandfathering’ on an ABP does not mean you automatically lose the CSHC. Only if the deemed income from the new ABP together with your adjusted taxable income pushes you over the income threshold for the card will you lose it – if you’re within the relevant threshold, you’re ok.
So, if you ‘run the numbers’ with deeming on a new ABP, you may find that you’re not trapped in your ‘grandfathered’ ABP after all.