Don't forget about grandfathered account-based pensions

2 Sep 2020

Recently Meg Heffron wrote a blog about one of those cases where the retiree undertook a classic “pension refresh” after making contributions and his CSHC was lost.

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What is a “grandfathered” pension?

From 1 January 2015, the income test treatment of account-based income streams (pensions and annuities) changed for both the CSHC and Government income support payments (eg Age and Service Pension) purposes – making these products subject to deeming rather than not income tested at all (for CSHC) or applying a more generous income test formula (for Age Pensions).

So as not to disadvantage those already in the system, existing ABPs are “grandfathered”, meaning they continue to receive the old treatment so long as: 

  • The ABP was purchased or established prior to 1 January 2015, AND
  • The same pension remains in place post 1 January 2015, AND
  • Either
    1. the owner held a CSHC then and has continuously held the card ever since, or
    2. the owner was in receipt of an income support payment then and has been receiving continuous income support payments ever since. 

As time goes by and we get further away from 2015 and more super law changes come in to distract us, it’s going to get easier to forget that a client’s ABP is grandfathered.

When advising on stopping and starting account-based pensions ALWAYS check to see if the pension is grandfathered and if the member has a CSHC or is on an income support payment such as Age or Service Pension.

The lesson from the cases we have seen recently is that there is no discretion under the law allowing deeming not to apply to ABPs established after 31 December 2015.

New ABP = deemed. Full stop. Even special circumstances can’t change that fact.

It’s important that you understand grandfathering if you have clients with these products, as losing their CSHC or Age Pension can often be (sometimes disproportionately) devasting for the client.

Grandfathering Tips and Traps

  •  An ABP that is grandfathered for CSHC purposes is not grandfathered if moving from CSHC to Age Pension (because, say, assets have reduced in value). Once an individual moves from one to the other, the condition requiring continuous receipt ceases to be met.
  • Adding accumulation amounts to an existing pension results in a new ABP even if the account number is the same as the old one, and even if it is done in the same fund (eg an SMSF). 
  • Similarly, rolling over to a new ABP provider results in a new ABP, even when the features of the two pensions are exactly the same.
  • A reversionary ABP continues to be grandfathered on reversion to a surviving spouse IF that surviving spouse continues to receive their CSHC or income support payment (whichever is applicable) uninterrupted.
  • Conversely, a non-reversionary grandfathered ABP paid as a death benefit ABP to the surviving spouse ceases to be grandfathered on death. This is because the original ABP ceases on death.
  • An ABP that is grandfathered for an individual is also grandfathered for their spouse (and vice versa), even if that spouse was not on a CSHC or income support payment on 1 January 2015. This is because a couple’s income test uses combined income.
  • For Age Pension purposes, grandfathering does not make a difference for those for whom the assets test applies. In some cases, rolling over a pension and losing the grandfathering may not be an issue in the short to medium term (but it may eventually when/if asset levels reduce to a point that the income test starts to prevail over the assets test). On the other hand, the CSHC is only subject to an income test, so considering grandfathering will always be relevant.

Messing with a grandfathered pension falls firmly into the category of problems you can’t fix, so to avoid risk to your business, always consider it when advising on pensions.