As of January 1st 2015 the way allocated pensions (also known as account based pensions) are treated by Centrelink is set to change, and unfortunately not favourably for pensioners.

Currently money invested in an allocated pension is treated concessionally. In simple terms, the funds invested at the beginning of the investment are divided by the clients life expectancy, this amount, known as the deductible amount, is not counted to the income test. So if a 65 yo male invested $200,000 into an allocated pension, his life expectancy would be 18.54 and his deductible amount would be $10,787.  In this scenario the first $10,787 of income drawn from the allocated pension is not counted for Centrelink income test purposes I.E If $15,000 is drawn from the allocated pension only $4,213 is considered income by Centrelink.

As of January 1st 2015 funds invested in accounts based pension will be treated like all other investment assets and will be subject to Deeming rates. Currently investment assets are deemed at 2% for the first $46,600 and 3.5% for any additional investment assets. In the above example the assessable income for Centrelink would be $6301.  The current deeming rates are at a historical low, and in the past have been considerably higher, if deeming rates increase, which is likely, the new treatment will further disadvantage most pensioners.

Those with higher balances are the most disadvantaged, especially if they drawing minimal pensions, but all people who are hoping to receive Centrelink pensions should review their retirement plan.

There are grandfathering provisions that see all allocated pensions commenced before the end of this calendar year treated under the current more favourable income test, therefore it is advisable for anyone looking to retire in the near future to seek advice in relation to allocated pensions as soon as possible.

Please contact Future Financial Services if you have any queries in relation to the new legislation or any other financial planning matter.