The tax magic of account-based pensions

By Damien Quirk, AFP®, Financial Advisor, Blueprint Wealth

This article was published in The West Australian’s ‘Securing Your Future’ 24-page essential guide to retirement on Monday, August 25, 2014.

With flexible investment choice and tax-effective payments, account-based pensions can play an important role in accessing your super nest egg to fund your retirement.

Today’s ABPs typically allow accounts to be monitored online and allow you to see when the next payment is due, how your assets are performing and how often your superannuation provider credits investment returns to your account.

To counter the impact of turbulent markets, you can even purchase insurance to mitigate some of the dips in asset values and therefore provide a more certain future. This may be important when investing in markets during the initial years, to prevent a poor sequencing of returns. These insurance-based options come at an extra cost, but you can guard against losses.

You can invest in familiar options such as cash or fixed interest (bonds), Australian or international shares and property and alternative assets.

Once established, the ABP will pay you a regular income, based on government-mandated aged based minimum limits.

One advantage in keeping your retirement wealth in an ABP is that any income and capital gains derived by the assets used to generate your pension income will be completely tax free. And, after the age of 60, the income you receive from the ABP is free from any personal income tax.

What happens if I die with money in my ABP?

Couples in retirement can generally nominate each other to continue receiving the income from the deceased spouses’ ABP. Alternatively, you can nominate another dependent to receive any remaining balance of your ABP.

You can also have the funds directed to your estate according to your will.

Change is coming

The government has recently made some reforms to the effectiveness of ABPs over other types of retirement income when it comes to claiming benefits such as the Age pension. From January 1, the account balance of your ABP will generally be deemed under the Centrelink income test.

However, certain established ABPs can be grandfathered if a government benefit is being received before January 1.

How will the reform affect aged pensioners?

People with a grandfathered ABP will continue to have a “return of capital” portion of their income payments exempted under Centrelink’s income test (called the “non-assessable portion” or NAP).

For ABPs established after January 1, or new applications for the age pension (from this date) by people with an existing ABP, the deeming rules will apply. Currently, the deeming thresholds are $48,000 for singles, $79,600 for pensioner couples and $39,800 for members of “allowee” couples. The deeming rate is 2 per cent a year for amounts below the thresholds and 3.5 per cent above the thresholds.

Income costs of reform

While deeming rates are relatively low, a non-home owning couple with an ABP of $300,000 (ignoring other assets) will see an annual reduction of up to $961 in age pension payments.

Should the lower deeming rate rise to levels such as 5 per cent, the annual reduction in age pension payments to the non-home owning couple could be as high as $5,461 annually.

By having the account balance of your ABP deemed, these “losses” in age pension incomes are compounded significantly considering the average life expectancy at 65 is 18 years for a male and 22 years for a female.

A sting for couples

Members of a couple are generally able to nominate each other as their reversionary beneficiary.

So, upon the death of a partner of a couple, grandfathering of an ABP can be extended to ensure that an existing ABP can be received by the remaining partner under the same Centrelink rules – provided they are in receipt of an income support payment from Centrelink.

Minimum drawdown of your account-based pension by age

Under 65 4%
65 – 74 5%
75 – 79 6%
80 – 84 7%
85 – 89 9%
90 – 94 11%
95 or over 14%

However, there is a potential sting because, if the reversion is not set up correctly in the beginning, the ABP grandfathering will not be extended.

There’s complexity, and cost if you don’t consider the importance of advice. The cost of not being eligible for the Centrelink age pension is much higher than the cost of advice.

At Blueprint Wealth, we offer financial advice that is right for you, no matter what stage of life you are at. Contact us today to set up a plan that is right for you.

Damien Quirk is an authorised representative of AMP Financial Planning Pty and a financial advisor with Blueprint Wealth.

Blueprint Planning Pty Ltd ABN 78 097 264 554 trading as Blueprint Wealth is an Authorised Representative and Credit Representative of AMP Financial Planning Pty Limited ABN 89 051 208 327 Australian Financial Services Licence 232706 and Australian Credit Licence 232706.

Any advice given is general only and has not taken into account your objectives, financial situation or needs. Because of this, before acting on any advice, you should consult a financial planner to consider how appropriate the advice is to your objectives, financial situation and needs.