From January 1, 2015, the income test for Commonwealth Seniors health care (CSHC) card will become a lot stricter.
Retirees who make changes to their finances after this date could lose this valuable concession card, which provides discounts on medical and (in some states) electricity bills.
Currently superannuation income streams, or account based pensions, enjoy an exemption from the CSHC income test but, from next year income from superannuation pension accounts will be included in the means test for the card, in the same way as other financial investments, such as shares and managed funds.
The allowable income threshold for the card is about $80,000 a year for a couple combined and about $50,000 a year for singles. If you are already a cardholder, existing account-based pensions will remain exempt if no significant changes are made to the pension after January 1, 2015, and you otherwise maintain your eligibility.
Who will be most affected?
Existing cardholders who don't plan ahead will be the group most likely to lose out.
The grandfathering of current exemptions is generous but only if you maintain eligibility.
Being aware of the impact restructuring and changes to your finances will have on the classification of any existing pension is critical to achieving this.
Changing pension providers or restructuring your super assets for other purposes such as estate planning could lead to loss of grandfathered exemptions as they are likely to result in a new pension being commenced.
Retirees with high levels of income relative to the allowable threshold need to be particularly careful as they won't have much room to move.
This could be people who have certain defined benefit pensions such as retired commonwealth public servants or large investments outside of super.
What can you do?
Review your situation and put in place any changes well before the Christmas break. From January 1, 2015, care should be taken to preserve grandfathering rules and keep access to the health card.
Considering overseas travel plans might sound unrelated but retirees who spend more than 19 weeks outside Australia may have their card cancelled.
Although you can get them back when you get home, the exemptions on grandfathered super pensions will be lost.
Putting in place an automatic reversionary option on your existing pension may preserve the more favourable income test treatment if you pre-decease your spouse.
This option means your pension will continue after death but with payments made to your surviving spouse. No changes are required by the pension provider.
Although early drafts of the legislation do not reflect this intricacy, the Department of Human Services has confirmed this detail will be corrected to align the treatment of income streams for CSHC purposes with Age Pensioner recipients.
Even if you do not expect the proposed changes to affect your eligibility for the card, it is prudent to plan ahead to protect against future legislative change and optimise your personal situation.
Restructuring before the changes occur can assist to minimise income assessed in future and to maintain eligibility if, for example, income thresholds are reduced.
Nerida Cole is managing director of financial advisory for Dixon Advisory
Clarification: An earlier version did not say that concessions for electricity discounts for CSHC holders varies between states and territories.