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A lot has been said about the proposed legislative shift toward having Superannuation Pension income streams deemed for Centrelink purposes,
rather than the current system of deductible amounts. It is a big change from a planning perspective as it means we have yet another grandfathered structural
consideration to remember before giving advice.
From what I can see, the change will mean that more income is attributed to a person/couple, but that in many cases this will have little
effect if any on the amount of pension actually received. Certainly, other planning considerations would eclipse the minor loss of pension. There are
exceptions to this however, so the choice to commute an existing pension suddenly becomes harder, and clients can expect to have multiple pension
accounts going forward (so much for simplifying the system).
What the change does do however is make the effects (whether small or large for an individual client) very sensitive to future changes in
the deeming rates. Current rates are only 2% and 3.5% (below and above threshold respectively) which by historical standards is very low. In 2008 these were 4% and 6% respectively and if rates revert to these levels the effect on pension payments could be substantial.
I’m a bit perplexed by the rhetoric in the media about how this creates a disincentive to saving in superannuation and will cause major problems
for those on pensions or approaching pension age or looking to retire. At this point I’m seeing it as a mountain made out of a mole hill for our clients.
What are the other effects of the change? Well for advisers who deal with Centrelink quite a bit the answer to this is clear. The paperwork and
calculation reductions will be massive (and that’s just in my tiny office, imagine Centrelink). Every time a pensioner does a partial commutation this
requires a recalculation of the deductible amount that relates to the income test. Every Time! Deeming would do away with that and the corresponding
reporting. Relevant numbers would become largely irrelevant. No more looking up life expectancy tables every time a pension is commuted and recommenced, made
reversionary etc. Even the detail of income stream product forms probably become redundant.
Last but not least, gone are the worries about how to classify additional monies required by a client during the year. Is it income (more than
reported to Centrelink) or is it a commutation? What are the negative effects of either option? These questions no longer apply if the remaining capital amount
is simply deemed.
So this change seems to me to be something that potentially has little if any effect on the basic payments made to people on the age pension. It will cut down
the administrative complexity in the system to a large extent. However, the individual result on a client by client basis can vary significantly depending
on their circumstances and these change over time. So the planning complexity has increased.