Q&A: Grandfathered account based pensions and avoiding the new deeming rules September 16th, 2022
My wife and I have existing grandfathered account-based-pensions (ABP) operating through our self-managed super fund and Commonwealth Seniors Health Cards (CSHC).
We are selling our home presently and are both intending to make downsizer contributions to our super funds. Our understanding is that if we roll-back our existing pensions and add the new contributions and start new ABPs, the grandfathering status will be lost.
If, however we each start new pensions from the downsizer contributions, while keeping the existing pensions unchanged, we believe only these new pensions are subject to deeming rules. Is this correct?
Can I get my question answered?
The Grandfathering you refer to, relates to people who were in receipt of an ABP and who held a CSHC prior to a rule change that applied from January 1, 2015.
People who tick both boxes, remain under the old rules which means none of the money received from the ABP is counted towards the CSHC income test limits. New ABPs since that date are caught under the deeming system.
However significant recent events, change the attractiveness of preserving these grandfathered ABPs.
The Government has introduced legislation that will significantly lift the income test limits to $90,000 per annum for singles and a combined $144,000 for couples.
Equally, the deeming rates themselves have been frozen until July 2024. A couple with the maximum permitted amount of $1.7 Million each (under Transfer Balance Cap rules) would have a combined deemed CSHC income of $74,628. Well under the expected $144,000 limit. Money in accumulation phase is not included and is effectively ignored. Even a single person with a $1.7 million ABP, would only have deemed income of $37,122 under the post 2015 ABP rules.
Nonetheless, there is a risk that interest rate rises will continue to rise over the next few years and at the end of the two-year freeze on 30 June 2024, the deeming rates will increase significantly. If for example, they returned to pre-CGC deeming rates or 4 and 6 percent, the deemed income on $3.4 Million would be more than $270,000 per annum.
If you are concerned that with the addition of the super down-sizer contributions you may be over the limits, then your suggested strategy may help reduce the impact. There are no restrictions on having multiple ABPs operating at the same time.
That way, some of your ABP income will be assessed under the old rules and some under the new. The trade-off may be the additional costs and complexities in running what amounts to 4 separate ABPs within the SMSF. If your total balances will be less than say $2 Million with the additional contributions added in; even with possible increased deeming rates in the future, there seems little benefit in retaining the Grandfathered ABPs.