Jennifer Brookhouse provides tips to help advisers understand and implement the new rules for Centrelink pensions.
Like many legislative amendments, the Centrelink changes on September 20, 2009 provided an opportunity to communicate to clients. They also require a review of your business processes, including calculators and client resources.
The main impacts that are important to understand include:
- the new terminology;
- how the payment reductions work for clients near the cut-off thresholds;
- when to assess a client’s pension under the transitional rules or the standard (new) rules; and
- the new work bonus rules.
The main focus for Centrelink in this year’s Federal Budget was to increase the single pension by $30 per week. This was delivered from September 20, 2009 and pensioners should now be enjoying the increase. The pension supplement was introduced to provide one combined payment to replace the GST supplement, pharmaceutical allowance, utilities allowance and telephone allowance. The supplement is added to pension payments and also provides a small increase for all pensioners.
However, because changes were made to the income test reduction rate (increased from 40 cents to 50 cents) a set of transitional rules apply to ensure pensions do not fall for existing pensioners. Care is needed when looking at Centrelink rate charts to decide whether you need to use the standard pension rates and thresholds or the transitional pension rates and thresholds (see information below on transitional rules). The maximum pension rates (including pension supplement) to March 19, 2010 are: Although the transitional pension rate is lower a client may receive a higher entitlement due to the lower taper rate.
Calculation under the standard rules
Under the standard rules, the steps to calculate the pension payable are slightly modified for clients near the cut-off thresholds. The pension reduces to the minimum pension supplement amount ($30.20 pf singles or $22.80 pf for each member of a couple) and then stays fixed at this amount until the cut-off threshold where no pension is payable. Once a person reaches the cut-off threshold, they no longer qualify as a “Centrelink pension recipient” and are classified as a self-funded retiree. They can then apply for the Commonwealth Seniors Health Card (CSHC) and Seniors Supplement.
The transitional rules aim to ensure that all existing pensioners receive some increase in pension. The differences between the transitional rules and the new standard rules are:
- Lower maximum pension
- Income test taper rate is 40 cents in the dollar
- 100% of employment income is assessable
- Pensions are indexed by the Consumer Price Index (CPI).
- Higher maximum pension rate
- Income test taper rate is 50 cents in the dollar
- Work bonus reduces the amount of assessable employment income
- Pensions are indexed by the higher of CPI and the new retiree inflation index.
Given the two sets of rules, it is important to know if the client’s entitlement is assessed under the standard rules or the transitional rules. If the transitional rules apply, every time the pension is recalculated it is calculated under both sets of rules to determine which set gives the better outcome. Once the standard rules provide a better outcome, the transitional rules no longer apply and calculations will only be done under the standard rules. The interaction of the standard and transitional rules is outlined in the flowchart below.
As a quick rule of thumb:
• a single person with assessable income under $618 per fortnight or a couple with combined assessable income under $285 per fortnight will be assessed under the new standard rules and the transitional rules will cease to apply;
• if the asset test is the overriding test the person will move to the new standard rules and the transitional rules will cease to apply; • a person who is working is likely to benefit from the standard rules and the work bonus.
The pension bonus scheme closed for new registrations on September 20, 2009. Anyone registered for the pension bonus before that date can still apply for the bonus when they apply for an age/service pension. The pension bonus has been replaced with the work bonus scheme. Under this scheme, a person who is of age/service pension age or older will receive an exemption for half of the first $500 per fortnight derived from employment. This is in addition to the normal income-free threshold. The work bonus is automatically calculated by Centrelink so clients do not need to specifically apply. The work bonus applies to salary/ wages and director’s fees from employment performed either inside or outside Australia. It does not apply to income derived as a sole trader or from a partnership.
The work bonus provides an attractive incentive for clients who wish to work while receiving an age pension. It provides an opportunity to increase income while minimising the impact on their pension entitlements. It only applies to clients who have their entitlement assessed under the standard rules. Clients who have their entitlement assessed under the transitional rules will continue to have 100 per cent of employment income included in their assessable income. This presents a marketing opportunity for advisers to write to clients to update them on the change. Clients who were previously excluded from age pension due to high levels of income (which included employment income) may wish to review their position.
Busi ness processes
The changes provide an opportunity to communicate with clients. However, certain business processes need to be reviewed including:
• the tools and processes used in your office that need to be updated or modified for the new rules and terminology (including introduction of pension supplement and removal of pharmaceutical allowance). Your list to update may include:
– Statement of Advice (SoA) templates
– client educational/marketing materials
– calculators or spreadsheets.
• note on client files as to whether the client has moved to the standard rules or is still assessed under the transitional rules. If uncertain, details can be checked with Centrelink or Department of Veterans’ Affairs (DVA).