Pension Grandfathering Rules

Pension grandfathering rules apply to recipients of account based pensions (formerly allocated pensions) continuing to have their pension assessed for Centrelink and Aged Care purposes under the deducible amount method, rather than the deeming method.

Some conditions need to be met for the pension grandfathering rules to apply.

If the pension grandfathering conditions are met, the deductible amount can be applied to income received from the allocated pension, which usually results in a lower assessable income under the ‘income test‘ for Centrelink, DVA and Aged care purposes.

Lower income assessment can result in higher Age Pension payments and lower Aged Care fees.

The pension grandfathering rules do not always provide the best outcome, as will be demonstrated in the example below.
 

What is Grandfathering in Superannuation?

 
The definition of grandfathering in superannuation simply means having an old rule continuing to apply to a situation because it wouldn’t be fair to apply the new rules on people in certain circumstances, due to them entering an arrangement with a certain understanding. Applying the new rules would have material adverse consequences on their situation.

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In such instances, an old rule will continue to apply to existing situations and the new rule will apply to all identical future situations. A situation has been ‘Grandfathered‘ if it is exempt from the new rules and, instead, continues to have the old rule apply.
 

Grandfathered Account Based Pension

 
An account based pension (or allocated pension – same, same) is eligible to have the pension grandfathering rules applied if the account based pension was commenced prior to 1 January 2015 AND the pension recipient was, on 31 December 2014, in receipt of a social security income support payment and has been ever since.

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A Centrelink schedule generated by the income stream provider will include all of the information required to calculate the deductible amount. See an example of a Centrelink Schedule here.

Account Based Pension Centrelink Assessment

 
The pension grandfathering rules are relevant to the Centrelink or DVA ‘income test’. The income test helps determine the level of social security benefit payments (e.g. Age Pension) that an individual should receive and/or the level of aged care fees payable.

It works like this: Prior to 1 January 2015, all of the income received from account based pensions / allocated pensions was assessed under the ‘income test’ using the Centrelink Deductible Amount method, using the following formula:

Assessable Allocated Pension Income = Annual Payments minus Deductible Amount

Deductible Amount = (Pension purchase price minus any lump sum commutations since commencement) divided by relevant number at commencement*

*Relevant Number is based on Life Expectancy at commencement and can be found here.

However, from 1 January 2015, account based pensions are assessed under the ‘income test’ using the Centrelink Deeming provisions, unless of course the pension grandfathering rules apply.
 

Account Based Pension Centrelink Assessment Example

 
Rob started an account based pension with $400,000 on 1 July 2014 at the age of 65. At the same time, he became eligible for the Centrelink Age Pension and began receiving payments.

His account based pension is now valued at $360,000.

Rob has been receiving monthly payments from his account based pension of $2,000/mth since it started and made a one-off lump sum withdrawal (commutation) in 2016 of $5,000 to gift to his daughter.

Centrelink Deductible Amount Method

Deductible Amount = ($400,000 – $5,000) / 18.54

Deductible Amount = $21,305

Assessable Account Based Pension Income = ($2,000 x 12) – $21,305

Assessable Account Based Pension Income = $2,695 p.a.

As Rob had his account based pension in place prior to 1 January 2015 AND was in receipt of income support payments (Age Pension) on 31 December 2015, the income from his account based pension will be assessed using the Deductible Amount Method.

Despite drawing an income of $24,000 per annum ($2,000 per month) from his allocated pension, only $2,695 per annum of Rob’s pension income is assessable under the Centrelink ‘Income Test’.

The current value ($360,000) of the pension is not relevant for this calculation, but is the amount used under the Centrelink ‘Assets Test‘.

Deeming Method

Rob’s account based pension would not be grandfathered if any of the following occurred:

  • He stopped receiving income support payments at any time, even temporarily, after 31 December 2014
  • He closed his original account based pension and recommenced a new one at any point after 31 December 2014 (including refreshing/recasting the pension)

Should either of the above occur, Rob’s allocated pension would be deemed for Centrelink ‘Income Test’ purposes and the deductible amount method would no longer apply.

Under current deeming rates, The current value of Rob’s account based pension would be deemed to earn the following income (assuming he is married and has no other savings):

First $85,000 of combined financial assets deemed at 1.75%

Anything over $85,000 deemed at 3.25%

Rob’s Assessable Income = ($85,000 x 1.75%) + ($275,000 x 3.25%)

Rob’s Assessable Income = $10,425

The ‘actual’ pension income received from an account based pension is irrelevant when the Deeming Method is used.

As you can see, above, Rob’s assessable income under the grandfathered Deductible Amount Method is only $2,695 p.a., but is $10,425 p.a. under the Deeming Method. This shows the benefit of the pension grandfathering rules under this situation.
 

Are the Pension Grandfathering Rules Always Better?

 
Account Based Pension Centrelink assessment under the ‘Income Test’ is not always better under the pension grandfathering rules.

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Under the example above; if Rob’s pension was assessed under the Deductible Amount Method, but he nominated to receive pension payments of, say, $3,000 per month ($36,000 p.a.), his allocated pension assessable income under the income test would be $14,695, which is higher than the assessable income if his account based pension was assessed under the Deeming Method, as shown below.

Assessable Income = $36,000 – $21,305

Assessable Income = $14,695

In this case, he might be better off drawing a lower pension income or closing and restarting a new account based pension so that it becomes deemed.

Keep in mind that closing and restarting a pension may have other implications including, but not limited to; tax consequences, estate planning ramifications, transaction costs, etc.
 

Age Pension Calculator

 
This article explains the differing income assessment of account based pensions/allocated pensions depending on when the pension commenced and receipt of income support payments.

This information can be used to assist in completing the inputs for an Age Pension calculator.

Here is a link to one of the many Age Pension calculators. However, any online Age Pension calculators should be used as a rough guide only. Actual eligibility and payment rates will be determined by Centrelink or Department of Veteran Affairs (DVA) upon application for social security benefits or assessment for Aged Care fee purposes.

Chris Strano

Chris Strano created SuperGuy to help the average punter navigate through the complex and ever-changing super rules. It has since become one of Australia's leading digital super resources. Subscribe to SuperGuy's YouTube channel for the latest strategies to boost your super savings. https://www.youtube.com/c/superguyau

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8 Comments

  1. phonse

    Hi Chris.IF I have say a high amount in an a/pension [in a term deposit] and want to withdraw it all and then put it in an ordinary personal term deposit ,would I be deemed in the same way as if it is in the new rules and would my centre link pension amount still stay the same? and would it be a bad move as I don’t want to be subject to income tax. [the fees in super are high compared to no fees in a personal term deposit.] Thanks Phonse.

    Reply
    • Chris Strano

      Hi Phonse, if you have an account based pension that began after 1 January 2015 or you were not in receipt of income support payments on 31 December 2014, then the account based pension will be deemed.
      (If you have a grandfathered pension, assessed using the deductible amount, you should seek advice before making any changes, as closing down a grandfathered pension could significantly reduce Age Pension payments.)
      If a ‘deemed’ account based pension was closed down and the balance invested into a term deposit in your personal name, this amount would be deemed also; so there should be no change in Centrelink assessment or Age Pension payments.
      As far as tax goes, all earnings received within an account based pension are completely tax free; whereas earnings in your personal name are taxed at your marginal tax rate. In this case, term deposit income would be added to all of your other sources of taxable income (including Age Pension payments) and taxed at your marginal tax rate. Here is a calculator that you can use as a guide to see if you would be subject to personal income tax. Make sure you include all current income, plus estimated income if the term deposit was owned in your name.

      Reply
  2. Phonse

    Thanks Chris.I do have a grandfathered allocated pension. Would it effect my age pension if I commute a large amount to a personal term deposit and still have plenty in my allocated pension as well.I am over 60.Will I still be asset tested.

    Reply
    • Chris Strano

      It’s not possible to calculate without knowing precise figures. It also depends on how much income you receive from your pension. In any case, I am not authorised to give personal advice. I suggest using this calculator as a guide to see how you might be affected (current/proposed scenarios). Alternatively, phone Centrelink on 132300. They are usually helpful in discussing ‘what if’ scenarios. Otherwise, you could always see professional advice from an authorised financial planner.

      Reply
  3. Mac

    My husband and I are both retired and are both receiving impression of a part pension from Centrelink. My husband’s superannuation has a grandfather clause attached. Mine does not. What impact does that have on our part pension?

    Reply
    • Chris Strano

      Hi Mac,
      The grandfathering rules relating to the deductible amount of a pension income stream relate to how it is assessed under the Centrelink income test.
      A grandfathered pension has a deductible amount associated. The deductible amount is taken away from the actual income received to determine the level of income assessed under the Centrelink Income Test.
      A non-grandfathered pension is simply deemed to earn an income. The actual income received from a non-grandfathered pension is irrelevant for Centrelink Income Test Purposes.
      Centrelink applies an income test and and assets test. The test that results in you receiving the lowest level of Age Pension is the one that is applied.

      Reply
  4. Danny

    Hi Chris,

    Say I had a account based pension that had commenced prior to Jan 2015, however I was NOT in receipt of any centrelink payments in Dec 2014. Does this mean that my account based pension would be deemed rather than counted as grandfathered? Todays rules would apply?

    Reply
    • Chris Strano

      Hi Danny, that is correct. For it to be grandfathered you would have had to also be receiving a social security payment or allowance on 31 Dec 2014. If not, it will be deemed.

      Reply

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