Account-based pensions: don’t bury your head in the sand!

A businessman hiding head in sand.

On 1 January 2015 the official social security assessment process of account-based pensions (ABP) for the purposes of establishing a person’s age pension entitlement was changed.

Prior to this date – the balance of the ABP was assessed as an asset, and for the purposes of calculating the income to be assessed under the income test, the income being drawn from the ABP as a yearly pension was reduced by a deductible amount.

This deductible amount was viewed as a return of a person’s capital, and could subsequently reduce the amount being assessed under the income test. In a substantial number of cases – this was to zero.

After 1 January 2015 the ABP for new recipients of the age pension was viewed as a financial asset, and was subject to the deeming rates (similar to how this is used for bank accounts, term deposits, managed investments, and shares).

This change in the income test treatment of ABP meant that for people who were already in receipt of the age pension; any adjustment to the manager, or the structure, of the ABP could have a detrimental effect on the age pension that they were entitled to receive.

This situation has led to, I believe, a reluctance on the part of pensioners over the last 18 months to review – or alter – their current ABP because of the possible detrimental effect any change could have on their current pension entitlement.

This reluctance to review their circumstances is not a healthy position for retirees to take.

I stress to all our readers; do not put this review off any longer. Now is the time to act and review someone’s ABP for the following reasons;

  • It is early into the financial year; let’s start the year off on the right foot.
  • On 1 January 2017 the age pension assets test will be tightened. These changes will see a substantial number of pensioners possibly switching from being assessed under the income test to being assessed under the assets test.
  • As a person ages the amount under legislation that they are required to draw from their ABP increases – this will mean that a higher amount of the yearly pension income will become assessable under the income test.
  • Any adjustment in the deeming rates, either up or down, should always be a prompt for a person to review their ABP, and the possible effect it could have on their pension entitlement. There is some speculation that there could be a downward movement in the deeming rates by the end of September this year.
  • Have the ABP administration fees increased? Any increase in the fees may be able to be offset to a certain affect by a change in provider and any adjustment in the value of the age pension, even a decrease, may still leave the pensioner in a better position.

Apologies if I have left you feeling a little confused and unsure as too what a person needs to be looking for when reviewing their ABP, but the legislation relating to the ABP (and a person’s pension entitlement) is complicated. It is these complications which makes someone reluctant to change or review their circumstances. Their concern being, “what happens if I make the wrong decision?”.

To avoid this predicament, and to better understand what action you need to take to improve your situation, talk to an expert.

A person who is familiar with the legislation and the future legislative changes, as both PK and I have often stated, is not your neighbor. Look for a person with the necessary qualifications.


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