1 January 2015 saw significant changes to the income assessment of account based pensions and effective abolishing of the deductible amount from that point on. However, individuals who had commenced an income stream prior to 1 January 2015 and were in receipt of a Centrelink payment were fortunate enough to have the deductible amount assessment of that income stream ‘grandfathered’ indefinitely. Click here for Centrelink Assessment of Account Based Pensions post 1 Jan 2015 OR Click here for the Centrelink Deductible Amount Formula for account based pensions.
As of 1 January 2016 there will be further changes to the assessment of income received from a pension. This time the focus is on defined benefit pensions.
What is a Defined Benefit Pension?
A Defined Benefit Pension is a pension plan whereby the income received in retirement is generally formula based and commensurate with pre-retirement earnings, years of service, and age.
A defined benefit pension will usually pay the beneficiary an income for life and may possibly even be partially reversionary to a spouse upon death of the primary member.
How are Defined Benefit Pensions Currently Assessed by Centrelink?
Defined Benefit Pension payments include a ‘deductible amount’ which can be obtained from the income stream provider and should have been included in the initial pension documentation upon commencement. Under the current rules, up until January 2016, the gross defined benefit pension payment, less the deductible amount, is assessed under the income test.
The deductible amount is based on the tax-free component up to a cap of 10% of the gross income.
For example, if the gross payment is $50,000 p.a. and the deductible amount is $20,000 p.a., only $30,000 is assessed by Centrelink under the income test.
Contact your defined benefit income stream provider for a schedule for Centrelink assessment purposes.
How will Defined Benefit Pensions be Assessed Post 1 January 2016?
As of 1 January 2016, the deductible amount under the Centrelink income test will be capped at 10% of the gross income.
For example, using our numbers above, the deductible amount will effectively be reduced from $20,000 p.a. down to $5,000 p.a. ($5,000 = 10% of $50,000). This means that $45,000 p.a. will be assessed by Centrelink under the income test – a significant difference which can have huge implications on Age Pension entitlements.
Are There Any Exemptions?
Yes, Veterans’ Affairs pensioners and military defined benefit pensions will be exempt from the proposed measures.
To avoid any confusion:
1. If the deductible amount associated with your defined benefit pension is already below 10% of gross payments, it will not be increased to 10%.
2. The 10% cap will be applied automatically. You do not need to do anything as of 1 January 2016.
Defined Benefit Pension Income Cap
Click here to read about the new rules resulting from superannuation changes as of 1 July 2017 for defined benefit pensions, including assessment against the transfer balance cap and taxation of income above the defined benefit pension income cap.