26/08/2024
Part pensioners to brace themselves for nasty shock with changes around ABP
Part pensioners and others sailing close to the point where Centrelink means testing applies may be in for a nasty shock over the next few weeks.
The auto-updating of account-based pension details is now being processed by Services Australia, the department responsible for agencies such as Centrelink and Medicare.
Twice a year, in February and August, almost all major superannuation funds provide individual account data to Services Australia, including their current account balance, the payment rate, and any commutations or lump-sum withdrawals.
Trustees of self-managed super funds are required to provide the updated information manually to Services Australia.
Annette Sinclair, former Centrelink officer-turned independent financial planner, said there was no set order to the automatic updates and it typically took a few weeks for all funds to be processed.
“We’ve just seen the results of the GESB super and Colonial First State updates being processed, and some of those customers are seeing reductions in their Centrelink benefits,” she said.
Account-based pensions are caught under both the asset and the income means testing system.
In most cases, in this current batch of updates, the asset test has had the greatest effect.
“When these were last done during February, the ASX200 was around 7600. During July, it got as high as 8100,” Ms Sinclair said.
“Depending on the day the report was generated, you could be looking at an increase of more than 6 per cent if you have a big exposure to shares.”
In a $400,000 ABP heavily invested in shares, for example, that translates to an increase in value of more than $20,000.
Under the $3 per $1000 asset test reduction rules, that would result in an aged or disability support pension reduction of more than $60 per fortnight.
“If you have seen a big cut in your pension, check the ABP account balance Centrelink is using. Because the markets were so volatile, it might be in your interest to provide a new updated Centrelink schedule from your fund,” Ms Sinclair said.
“If the account balance is now lower than the one recorded, you should see an increase in your pension.”
The effect of the auto-updates as far as the income test is concerned will depend on your circumstances.
Regular payments and commutations are unlikely to affect most Centrelink income payment recipients this way, but people who had an ABP and were in receipt of a full or part-pension before January 2015 may see a permanent adjustment to their payment rates.
Under the income test for most, ABPs are included in the total list of “financial assets” and included in the deemed income calculations.
For singles, the first $62,600 of financial assets is deemed to be earning 0.25 per cent, and the balance 2.25 per cent per annum.
This annual total is then divided by 26 to give a fortnightly amount and added to other assessable income. That total is tested against a single pensioner’s income-free area of $212 per fortnight.
For couples, the lower 0.25 per cent rate applies to the first $103,800 of combined financial assets and 2.25 per cent above that.
The couple’s combined income-free area is $372 a fortnight and above the income-free areas, the pension is reduced by 50¢ per dollar.
If the ABP ticks the pre-2015 box, the deeming system doesn’t apply to the ABP balance.
Instead, the actual annual payment rate is used, less a deduction based on the originally invested amount, divided by the investor’s life expectancy.
It’s complicated, but the bottom line is lump-sum withdrawals cause a recalculation of the amount that’s deducted from the regular payment.
It could mean the effects of the income test are greater than the effects of the asset test, so the income test will be used to clip your pension.
In some cases, seniors with pre-2015 ABPs are better off converting to a new ABP and having the current rules applied to them.
Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association - The West
