The new financial year signals the start of a number of important measures affecting superannuation and age pension entitlements, access to credit and an important change to the financial ombudsman’s remit.
Super fund contribution catch-up rules
Super fund members are now able to make use of new contribution catch-up rules. Fund members can carry forward concessional super contributions if their contributions in any given year fall under the $25,000 concessional contribution cap.
The contribution catch-up rule means that fund members can access unused concessional contributions from the current 2018/19 financial year and from then on.
AMP technical strategy manager John Perri says that if a fund member used up $10,000 of their $25,000 concessional cap in the year to June, under the new rule their concessional cap would increase to $40,000 for 2019/20 (the standard cap of $25,000 plus the unused cap of $15,000 from 2018/19).
They will be able to access their unused concessional contribution cap space on a rolling basis for five years. Amounts carried forward that have not been used after five years will expire.
To be eligible to make use of the catch-up provisions, a fund member must have a total superannuation balance of less than $500,000.
Individuals aged 65 to 74 who meet the work test will be able to use the scheme.
Super fund members thinking of using the scheme need to do a couple of things: check their total super balance to make sure it is under $500,000; and check their contributions level.
Pension Loan Scheme
More people will be able to take advantage of the Government’s reverse mortgage scheme scheme.
The old scheme allowed part-pensioners to top up the amount of Age Pension they receive to the maximum available pension.
The revised scheme allows eligible retirees to borrow regular income payments up to 150 per cent of the maximum pension entitlement (less the pension amounts they receive). This change opens the scheme up to full age pensioners and self-funded retirees.
Amounts borrowed under the scheme become a debt due to the Commonwealth and the debt must be secured by a charge against the borrower’s real property. Interest compounds until the debt is repaid.
The interest rate is 5.25 per cent. Interest is added to the outstanding loan balance until it is repaid. The debt is usually recovered when the property is sold, or from the borrower’s estate once the person dies.
Borrowings will be advanced in the form of fortnightly income payments. These payments will not count as assessable income for determining age pension entitlements.
AMP’s modelling suggests that a single person will be able to use the scheme to borrow up to a maximum of $36,000 a year and a couple will be able to borrow up to $54,000.
Pension age increases to 66
Australians born between 1 January 1954 and 30 June 1955 will now have to wait until they turn 66 before they can receive the Age Pension. This is part of an ongoing schedule to increase the Age Pension eligibility age to 67 by 2023.
The maximum rate for the Age Pension, including supplements, is currently $926.20 for a single person per fortnight. For a couple it is $698.10 per person per fortnight.
New means test rules for lifetime income products
The retirement income market is set for significant change, with the introduction of new means test rules for pooled lifetime income products. The rules apply to all pooled lifetime income products held by social security or Department of Veterans Affairs income support recipients purchased after commencement date (1 July).
Pooled lifetime income streams are products “that pool funds of multiple people to provide consistent income to surviving members for life.” They also include products that defer making payments for a period of time.
Under the income test, the means test will assess 60 per cent of payments from a pooled lifetime income stream as income. For example, where a lifetime income stream pays income of $5000 a year, $3000 will be assessed under the income test.
This reflects that part of the payments made are a return of the annuitants capital and therefore not income.
For deferred lifetime income streams, the assessment will apply once income payments commence and not assessed during the deferral period.
Term annuities are not covered by the changes.
Under the assets test, the means test will generally assess a proportion of the total purchase amount for the pooled lifetime income stream. Sixty per cent of the purchase amount will be assessed at the point of purchase. This will continue until the person reaches their “threshold day”, after which 30 per cent of the purchase amount will be assessed.
Threshold day is calculated with reference to the life expectancy of a 65-year old male on the assessment day, according to the Australian Government Actuary Life Tables (currently age 84). The threshold day is no less than five years after assessment day.
The industry has welcomed the new means test regime. Under the old rules the full purchase price of an annuity was means tested. The impact of this was that sales of lifetime annuities collapsed.
Financial ombudsman’s reach extended
Consumers with grievances against their financial institutions dating back to the period covered by the Hayne Royal Commission have an opportunity to lodge complaints with the Australian Financial Complaints Authority, following a move to extend the ombudsman’s jurisdiction.
The Australian Securities and Investments Commission has approved changes to the AFCA rules to allow it to deal with complaints dating back to 2008.
AFCA’s mandate will be extended for 12 months to allow it to deal with issues raised in the Hayne Royal Commission. Consumers who may have been alerted to issues of misconduct raised in Royal Commission hearings have a 12-month window to take their case to AFCA.
ASIC says AFCA will be able to deal with complaints about conduct by current member financial firms, which AFCA, its predecessor schemes, courts or tribunals have not previously dealt with.
Complaints must be lodged between 1 July 2019 and 30 June 2020.
Under normal circumstances, AFCA can only deal with matters that have occurred within the past six years. When a complaint has been through a financial service provider’s internal complaints process, the timeframe is reduced to two years.
Credit card lending rules have wider impact
The impact of reforms to responsible lending assessments for credit cards, which took effect in January, must now be applied to assessment of applications for other credit products.
Since the beginning of the year, applicants for credit cards and credit limit increases have had to demonstrate that they can pay off their credit limit over three years, rather than merely make minimum monthly repayments.
Now, when a consumer applies for other credit, such as a home loan, personal loan or car finance, the lender will have to consider applications on the basis that consumers with credit cards can repay their full obligations within three years.
This could, in some circumstances, make credit harder to get or mean that credit limits are reduced.
Under the credit card responsible lending rules, the credit provider must assess the suitability of a credit card contract or limit increase according to whether the consumer could repay an amount equivalent to the credit limit within three years.
Under the old rules, a credit contract was deemed unsuitable if it was likely that the consumer would be unable to comply with their obligations under the contract or could only comply with substantial hardship. Under this rule, card issuers usually made an assessment of the borrower’s ability to meet the minimum required repayments – typically 2 per cent of the outstanding balance.
The new rules also say that when assessing a credit card application, the credit provider must assume that the consumer is being charged the highest rate of interest that can be applied under the contract over the three-year period.
Insurance opt-in and other superannuation protection measures
APRA-regulated super funds are now prohibited from charging insurance premiums for inactive accounts, which is any account that has not had a transaction for 16 months.
Super funds cannot charge exit fees if members are switching out of the fund. Fees on balances under $6000 have been capped.
Relaxation of the work test for eligible recent retirees
Retirees aged 65 to 74 with a super balance below $300,000 (as at 30 June 2019) will be able to make voluntary super contributions for 12 months from the end of the financial year in which they last met the work test.
Currently, to make voluntary super contributions you must work a minimum of 40 hours in any 30-day period in a financial year.
The reason some people make voluntary super contributions at this stage is often to take advantage of the generous tax conditions within super and potentially increase their retirement balances. However, this may not be the right strategy for everyone.
Before making a financial decision, weigh up your personal circumstances and consider professional advice where appropriate.