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Pensions should be established before rule change

SMSF members belonging to the baby boomer demographic and requiring a retirement income stream should have their pension arrangements in place before the new deeming rules come into effect, a leading industry expert has said.

“For baby boomers, anyone who is over 55 years of age needs to be in a transition-to-retirement income stream that opens up into an account-based pension because once it is locked and loaded and is in before 1 January 2015, the existing pension rules will still apply,” SMSF Strategies principal Grant Abbott told delegates at the 2013 SMSF Strategies Day in Sydney last week.

“For existing clients that are already in pensions, what advisers have to do is consolidate or determine what they want to effectively do because they don’t want to be changing those arrangements at a later stage.

“If the client wants to have an auto-reversionary arrangement, it has to be done before 1 January 2015 because if you roll it back and start a brand new pension, you’ll be under the new rules.”

Abbott said the new rules would erode the flexibility around pensions, with individuals no longer having the ability to determine the applicable drawdown amounts for themselves.

In particular, individuals will lose the deductible amount, currently calculated on a straight line basis in relation to the life expectancy tables, in regard to the incomes test for Centrelink aged pension entitlements.

He illustrated the point with an example whereby under the existing laws a 66-year-old man starting a pension with a $600,000 balance and a life expectancy of 20 years would have the benefit of the first $30,000 of his pension each year being exempt from the incomes test.

However, under the new rules, where irrespective of what he draws down the first $45,500 is deemed to be generating a 2.5 per cent return with the remainder a 4 per cent return, the individual will be judged to have drawn an income of $23,337 for incomes test purposes.

“The impact will be significant and while it’s not a big issue now, when this individual turns 80, because his account-based pension will be depleted over that time, that’s when he’ll actually need more income,” Abbott said.

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