Grandfathered ABPs – keeping them alive beyond 2015
Yvonne Chu looks at the two categories of ABPs, and what advisers will need to consider when dealing with them.
There have been two categories of account based pensions since 1 January 2015 — those that are grandfathered under the current Centrelink income test treatment and those that are subject to deeming.
As a result, there are a number of strategies and issues advisers now need to be mindful of when dealing with ABPs.
Is the ABP actually grandfathered?
The first step will be to determine whether the ABP is grandfathered. For ABPs commenced on or after 1 January 2015, it will be obvious that they are deemed.
However, for ABPs commenced before 1 January 2015, advisers will need to ascertain from the client or Centrelink whether the ABP is grandfathered.
This will be particularly important for new clients and even existing clients as their circumstances may change over time, causing the loss of grandfathered status.
Superannuation funds will not be able to confirm whether an ABP is grandfathered as they will not know whether the client has continuously received a Centrelink/DVA income support payment since 1 January, 2015.
Dealing with clients with grandfathered ABPs
If a pre-1 January 2015 ABP is grandfathered, Centrelink/DVA will continue to assess the annualised pension payment that exceeds the deductible amount.
This may result in a more favourable income test treatment compared to having the account balance subject to deeming, which will be the case if grandfathering is lost.
Care must be exercised when dealing with pre-1 January 2015 ABPs to ensure grandfathering is not inadvertently lost as a result of financial advice. Grandfathering can be lost under any of the following three circumstances:
- Ceasing to qualify for an income support payment;
- Ceasing the grandfathered ABP; and
- Death.
Ceasing to qualify for an income support payment
If a client's Centrelink/DVA income support payment ceases, they will lose grandfathering on their ABP. Even if the client resumes receiving an income support payment shortly afterwards, as long as there is a gap in payment, grandfathering will be lost.
There are many ways for a client to lose entitlement to an income support payment.
Essentially, anything that results in a spike in income or assets above the cut-off thresholds or failure to meet ongoing eligibility criteria may cancel the payment.
While it is impossible to list all the possible scenarios, the following is a compilation of some likely situations that advisers should be mindful of:
- Lump sums: Receiving a lump sum that increases assets over the asset test cut-off, such as receiving an inheritance or pocketing a significant profit when downsizing the family home.
- Spouse: The combined income and assets of a couple are assessable for most Centrelink/DVA payments. Therefore any increases in the spouse's income or assets could cause a client's income support payment to cease. Things to watch out for include new employment arrangements, commencement of an ABP using superannuation that was previously exempt as the spouse was under Age Pension age or the spouse losing grandfathered status on their own ABP.
- Seasonal/intermittent work income: It is not uncommon for retirees (in fact, any Centrelink recipients) to do seasonal work such as school or university exam supervision, shearing, or fruit picking, which could cause income to exceed the income cut-off threshold.
- Leaving Australia to travel or live in another country: Some Centrelink payments are cut-off completely if a client leaves Australia for more than a permitted period, so it is important for clients to find out beforehand how their departure may affect their payment. Rules in this area are complicated as it depends on the payment type as well as whether the country they are going to has a Social Security Agreement with Australia. Generally, payments such as Disability Support Pension (DSP)1, Carer Payment, Widow Allowance and Parenting Payment will be cut off if the period of temporary absence exceeds six weeks. The Newstart Allowance may not be payable at all while a client is overseas, unless there is an exemption from the activity test requirements and is going overseas for medical treatment, family crisis or humanitarian reasons. The Age Pension, however, may continue to be paid indefinitely during a temporary or permanent overseas absence, although the payment may be proportioned after 26 weeks if the client has less than 35 years of Australian working life residence.
- Clients vacating their home temporarily: Where a client temporarily vacates their principal residence, they will generally be assessed as a homeowner for up to 12 months. Examples include going on an extended holiday (caravanning around Australia is a popular one) or travelling overseas. Unless a client states a definitive intention not to return to their principal home, an absence is generally regarded as temporary by Centrelink. Once the 12-month period has expired, they are considered a non-homeowner and the value of the home is assessed as an asset under the asset test, unless the client is experiencing delays beyond their control preventing them from moving back into their home.
Note: If the client rents out the family home during the period of temporary absence, the rental income will be assessable and could cause the client to exceed the income threshold.
- Death of a partner: A surviving partner may lose entitlement to an income support payment on the death of the partner and be assessed as a single person and subject to lower income and assets test thresholds. Unfortunately, this situation can be difficult to avoid as any transfers of assets from the surviving spouse to others will be caught by the Centrelink gifting rules. A possible strategy is for clients to consider leaving some assets to someone other than their spouse (for example, their children) via their will as the Centrelink gifting rules do not apply. However, careful assessment of the client's circumstances and objectives will be required before implementation as sometimes the benefits of retaining the assets in the surviving spouse's name will outweigh the cost of losing the Centrelink payment and grandfathering status.
Ceasing the grandfathered ABP
An ABP will no longer be grandfathered when it is fully commuted and cashed out or rolled over, including in the following circumstances:
- Adding or removing a reversionary beneficiary if recommencement is required (see below);
- Changing pension providers; or
- Rolling back to accumulation phase before recommencing a new pension.
Note: An ABP will not cease following a partial commutation or one-off irregular pension payment taken from the pension; hence this will not result in the loss of grandfathering.
Death
An ABP will retain its grandfathered status on death if it automatically reverts to a reversionary beneficiary who is in receipt of an income support payment at the time of reversion.
Where a reversionary beneficiary has not been nominated and a new death benefit income stream is paid to a surviving spouse on death on or after 1 January 2015, the new income stream will be deemed for Centrelink income test purposes.
In some cases, it may be possible to add a reversionary beneficiary to an existing ABP without commuting and recommencing the ABP but most superannuation funds do not permit it.
The superannuation and tax legislation is unclear as to whether a reversionary beneficiary can be added to an existing ABP without recommencing the ABP, so it depends on the governing rules of the superannuation fund as to whether this is permitted.
Centrelink also acknowledges2 that, subject to the governing rules of the fund, reversionary beneficiary may be added or removed from an existing ABP.
Where a reversionary beneficiary is able to be added to an existing ABP without re-commencing the ABP, the deductible amount will be recalculated using the longest life expectancy between the primary and reversionary beneficiary at commencement of the ABP, which could result in a lower annual deductible amount from the date the change occurs.
Strategic considerations
There are a number of strategic considerations for clients who hold a grandfathered ABP post - 1 January, 2015:
Minimise drawdowns from grandfathered ABP
Consider drawing the minimum annual payment from the grandfathered ABP to retain the pension as long as possible.
This could be achieved by drawing any additional required income from a deemed ABP as additional pension payments, regardless of size or when it is taken during the financial year, will have no bearing on the Centrelink income when taken from a deemed pension.
Minimise commutations
While partial commutations from an ABP will not cause grandfathering to cease, they will cause a permanent reduction in the deductible amount which may result in increased assessable income.
Time pension payments to the end of the financial year
Grandfathered ABPs can continue to take advantage of the current popular strategy of taking additional pension payments closer to the end of a financial year to minimise assessable income.
As grandfathered ABP income will continue to be assessed on a financial year basis, if additional pension payments are taken in the last 14 days of the financial year and then a new Centrelink schedule is provided for the next financial year, the amount of time that the additional pension payment is assessable is minimal and, in some cases, nil.
Care needs to be taken when implementing this strategy so that the client's payment is not cut off due to a huge spike in assessable income.
Assess whether deeming is better
There may be situations where a client is better off having their ABP assessed under the deeming rules rather than grandfathering. This will depend on a range of factors including the prevailing deeming rates, level of deductible amount and the annual pension payment.
For clients who draw down large pension payments, either voluntarily or involuntarily due to the minimum pension requirements, deeming may result in less assessable income. In practice, this decision is difficult as future changes in deeming rates could change the outcome.
It is important to note that this is a long-term decision that may not impact the client for years to come.
If a client loses the grandfathering status on their ABP, can it be re-instated?
Unfortunately, once grandfathering is lost it cannot be re-instated. Whether this adversely affects the client depends on a number of factors such as whether the client is income-tested.
For more analysis on the impact of this change, refer to the FirstTech Strategic Update article ‘Deeming of ABPs: What you need to know'.
For clients who have lost grandfathering, an alternative that is worth considering is purchasing a long-term annuity.
This is because, unlike ABPs, long-term annuities will continue to be assessed under the current rules where only the difference between the annuity payment and the deductible amount is assessed.
For a detailed comparison between long-term annuities and ABPs, refer to the FirstTech Strategic Update article ‘Are ABPs still worthwhile post-January 1 2015'.
Does this mean clients are locked into their existing grandfathered ABP?
To maintain grandfathering after 1 January 2015, a client is unable to rollover or commute their ABP with their existing superannuation fund.
While preserving the grandfathering provision is important for many clients, there are circumstances where rolling over the ABP might be in the client's best interest.
For example, a client who is asset-tested and unlikely to become income-tested in the future may benefit from the cost savings from changing pension providers.
What is important is for advisers to make a thorough assessment of the client's circumstances, weigh up the consequences and clearly articulate and illustrate the ongoing benefits of their recommendation.
Yvonne Chu is the senior technical manager at Colonial First State.
Footnotes
1. Exception applies to Disability Support Pension recipients with severe and permanent impairment and no future work capacity. From 1 July 2012, these types of DSP recipients are eligible for indefinite portability of their pension. For more information refer to Guide to Social Security Law section 7.1.2.20.
2. Guide to Social Security Law section 4.9.3.40.
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