Super fund members with a grandfathered account-based pension (ABP) should be cautious in moving to a deeming model as such a change is irreversible and any initial benefits may be decreased if they receive any increase in assessable income.
BT Financial Group technical consultant Michael Tran said superannuants with an ABP may choose to switch to deemed assets as the latter may be cheaper to administer and increase their pension, but there were downsides that can arise after the change.
“The decision to switch a grandfathered ABP can both be positive and negative and we really need to crunch the numbers to see how it applies to each person’s circumstances. Never assume it is one way or the other,” Tran said during an online briefing today.
“The definition of grandfathering requires the ABP to start before 1 January 2015 and if we switch to a new pension, this date will no longer apply, so the decision is irreversible, and we want to be certain that it is the right decision.”
He suggested advice practitioners ask their clients questions about their current situation and if that was expected to change in future as any increase in their financial assets may reduce any benefits gained from deeming.
“For example, they may be expecting an inheritance or are empty nesters that want to downsize and have surplus cash as a result of buying a cheaper home,” he said.
“They may find retirement boring and want to do some part-time work or are beneficiaries of their adult children’s family trust and expect to receive additional distributions.
“All of these can increase the amount of assessable income the client will receive, which can influence whether or not the decision to switch to deeming is a viable strategy.
“With an inheritance and downsizing with surplus funds, the effect of those is to increase their deemed investments and this will push more of their ABP to the higher deeming rate.”
He noted these rates were currently low and had been frozen since 1 July 2022 due to the impact of COVID-19, but the minimum rate was expected to jump to around the cash rate of 4.25 per cent at the start of the next financial year.
“Deeming rates are at historical lows and it might be beneficial to switch now, but if the rates are going to increase, grandfathering might be the better option,” he said.
“So check whether or not clients have optimised their current strategy with a grandfathered ABP because they still allow amounts above the minimum pension to be taken as a commutation, which are not assessed as income for income support purposes.”
