New rules for reversionary pensioners

With deeming rule changes for the Age Pension imminent, many pensions ‘grandfathered’ under existing rules could lose their special Centrelink exemption when the pensioner dies.

The main reason for this is because pensioners fail to make provision for a reversionary pensioner (the pensioner’s spouse or partner) because of the impact this could have on their Centrelink benefits while they are still alive.

The fallout from this, in some instances, is the loss of desperately-needed benefits for the surviving spouse or partner, says Partners Wealth Group, Director, SMSF Consulting & Auditing, Martin Murden

Under the new deeming rules – which take effect from 1 January 2015 – a super pension commenced after this date will be treated the same any other financial asset. It will be deemed to earn income (using the percentages determined by the government) and will be included in the income test. What this means is that a super pension/annuity will continue to be treated under current rules if the:

  • pension is already in place on 1 January 2015
  • pensioner is also receiving social security benefits, such as Newstart, Disability Income Support Pension or the Age Pension on 1 January 2015.

Mr Murden says while provision has been made for grandfathering pensions in order for dependents to receive these when the pension holder dies, they need to be nominated as ‘reversionary’ pensioners and be receiving Centrelink benefits at the date of death of the superannuation pensioner.

He says that some super pensions, and no one knows exactly how many, unfortunately do not make provision for reversionary pensioners because of the negative impact this could have on Centrelink benefits, a problem which is particularly prevalent in SMSFs.

“The current rules determine the amount of superannuation pension that is exempted under the Income Test. The calculation is based on the account balance at the start of the pension and life expectancy. If a reversionary pensioner is nominated, then the longer of the life expectancies of the pensioner and reversionary pensioner is used.

“The greater the life expectancy, the lower the amount excluded under the income test.”

Mr Murden says that it has become commonplace in SMSFs to establish the pension without a reversionary pensioner. “On the death of the pensioner, provided he or she was survived by a spouse or partner, the survivor simply opted to commence a new pension as the death benefit.

“However, under the new rules, a new pension is not grandfathered. Instead it is automatically subject to the new deeming rules which will have an impact on the income test, irrespective of the amount of pension taken.”

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What can you do?

To ensure the entitlements to Centrelink benefits are not lost, Mr Murden recommends that SMSF pensioners (or superannuation pensioners in general) who qualify to have their pensions grandfathered, should review their pension documentation to determine if a reversionary pensioner has been nominated.

 “If there is no such nomination or the documents cannot be located, we would suggest pensioners ask their advisors to review the pension arrangements and make changes where appropriate.

“However, before any changes are made, it is important to consider the effect that this change will have.” He also says that consideration needs to be given to when the superannuation pension commenced.

“Centrelink has different treatments of superannuation pensions under the Asset Test, depending upon when the super pension commenced. Some pensions, such as defined benefit pensions, have restrictions that affect the ability to stop the pension while account-based pensions can be stopped at any time.”

Mr Murden cautions that nominating a reversionary pensioner is not a simple process. “The existing pension needs to be commuted and a fresh pension commenced. Before commutation can occur, a pro-rata minimum pension payment needs to be made and the current balance for the pensioner determined.

“With a little over four months to go before the changes take effect, affected clients need to consider their options and take action immediately.”

*Grandfathering means securing exemption from new rules.

Partners Wealth Group is
one of Australia’s leading providers of financial services, finance lease, super and commercial lending.

Written by Debbie McTaggart