How do commutations affect the centrelink deductible amount?
For account based pensions that are 'grandfathered', commutations may have a significant impact on the income test assessment.
In this case, individuals will need to decide whether they wish one-off withdrawals to be treated as irregular pension income or a commutation.
- If the withdrawal is taken as a pension payment, it will be treated as income in the financial year the payment is made.
- If the withdrawal is taken as a partial commutation12, it is not treated as income under the income test. However, it will permanently reduce the income stream's Centrelink deductible amount.
The deductible amount will be recalculated as:
(Original purchase price - lump sum commutations)/original relevant number
There is no fixed rule as to when a withdrawal should be treated as either a pension payment or commutation; it must be determined in light of the client's circumstances.
Russell was 65 years of age, fully retired and receiving the Age Pension.
He commenced an account based pension with a purchase price of $300,000 in November 2014. His life expectancy at commencement was 18.54.
Deductible amount: $300,000/18.54 = $16,181
Russell requires $18,000 a year to meet his retirement income needs.
On 1 July 2018, he nominates to receive payments of $1,500 per month from his account based pension. For Centrelink purposes, the annual payment amount is:
Centrelink will assess an annual payment of $18,000 from 1 July 2018. Assessable income $18,000 - $16,181 = $1,819
Russell receives the maximum Age Pension under the income test.
In addition to his annual payment of $18,000, Russell also requires $20,000 in January 2019 to purchase a new car. He has the choice of taking the additional $20,000 as either:
Increased pension payment
On 1 January 2019, Russell decides to increase his pension payments to receive an additional $20,000 in the month of January, in addition to his regular $1,500 per month. For Centrelink purposes, the annual payment amount is:
Centrelink will assess an annual payment of $38,000 from 1 January 2019 for the remainder of the financial year.
Assessable income $38,000 - $16,181 = $21,819
Unfortunately Russell's Age Pension reduces substantially for the remainder of the financial year due to the additional assessable income.
Lump sum commutation
Alternatively, Russell could choose to take the additional $20,000 as a lump sum commutation. In this case, on 1 January 2019 Russell commutes $20,000 in addition to his regular $1,500 per month. The lump sum commutation is not assessed as income, however it does cause a recalculation of the deductible amount as follows:
(Original purchase price - lump sum commutations) / original relevant number
($300,000 - $20,000) / 18.54 = $15,102
From 1 July 2018 to 31 December 2018:
assessable income is $18,000 - $16,181 = $1,819
From 1 January 2019 to 30 June 2019:
assessable income is $18,000 - $15,102 = $2,898
The reduction in the deductible amount is permanent and will result in higher assessable income for the remainder of the income stream. In this case, Russell continues to receive the maximum Age Pension under the income test as his assessable income is still below the lower income threshold.
Timing is important
When electing to increase the amount of annual pension payments from an account based income stream, the timing is important as the increased assessable income will apply for the remainder of the financial year.
By timing the increased pension payment towards the end of the financial year, it can minimise the impact on Centrelink entitlements.
Clients have an obligation to notify Centrelink within 14 days of any changes in circumstances. If they time the increased pension payment towards the end of June and then notify within the 14 day period, they could potentially reduce the amount of income assessable.
Care should be taken as although Centrelink determine the assessable income from an account-based pension on a financial year basis, it may not be until August or September that the superannuation fund provides a new income stream schedule to Centrelink for the next financial year, which means that their Centrelink entitlements may be reduced until this time. Centrelink have advised that they do not pay arrears of Centrelink entitlements from 1 July until the time they receive the schedule from the superannuation fund.
Last modified: Tuesday, November 20, 2018