What is a commutation?
When you take a lump sum amount from your superannuation/pension account in addition to your regular income stream payments you will often have the choice to consider this payment as either:
- additional pension payment or
- a commutation of your pension.
Most of the time the best choice will be to consider the additional lump sum as an extra pension payment (1). This is because the commutation option will reduce the initial purchase price of the income stream and usually increase the amount of your income stream that is counted for the income test and leave you with a lower age pension received. In some situations a commutation can be the better option and it is best for a financial planner or other person with experience in age pension matters to perform a comparison of the two options for you.
Income Stream Rule Changes
A new rule is coming into force on 1 January 2015 which will change the way that income streams are looked at by Centrelink. For pension started before this date they will be treated by the old way i.e. ‘grandfathered’, which gives a certain deductible amount that is not counted for the Centrelink income test. All pension income drawn above this deductible amount is counted for the income test.
For pensions started after 31 December 2014 the asset value will be deemed just as other financial assets are (e.g. bank accounts, shares, term deposits, managed funds etc.) see http://www.humanservices.gov.au/customer/enablers/deeming. This means that the same amount of income will count for the Centrelink income test regardless of how much you actually take as an income.
At the moment the first $79,600 of financial assets for couples are considered to earn 2% income and assets above this amount are considered to earn 3.5%. It doesn’t matter if your financial assets earn more or less than this, Centrelink just uses a flat rate to simplify things.
When can a commutation be a good idea?
As we pass the 1 January 2015 date when the new Centrelink treatment will commence for new pensions, retirees can review whether they will receive a higher age pension under the old system or the new ‘deeming’ system. If the new system will offer a higher pension then you can contact your superannuation product provider to do a complete commutation of your pension to start a new pension. This will then ensure that your income stream is treated under the new rules.
How to receive a higher Centrelink Age Pension?
If you are a retiree it is important that you review your income stream and age pension situation under the current rules and the new rules that will start on 1 January 2015. If you will be better off under the new system you will then need to talk to your superannuation provider to complete a full commutation and then advise Centrelink accordingly.
You must also realise that once you change to the new system you cannot ‘go back’ to the old system. For this reason it is vital that you have a financial professional with experience in Centrelink and Age Pension matters review your income stream and evaluate the benefits of changing to the new system.
If you would like AJ Financial Planning to review your Centrelink and income stream situation, we are offering a free initial consultation and review. To take advantage of this offer please call (03) 9077 0277 or email firstname.lastname@example.org with the subject “Centrelink Review”.