Account-based pensions held by income support recipients before 1 January 2015 may be grandfathered — meaning Centrelink continues to assess them under the pre-deeming return-of-capital method rather than applying deeming to the full account balance. This typically produces lower assessable income and therefore higher Age Pension payments. Grandfathering is permanently lost if the pension is commuted and restarted, the fund is changed, or the holder loses income support and reapplies.
If you started your account-based pension (ABP) before 1 January 2015 and were receiving the Age Pension or another income support payment at that time, your pension may be assessed for Centrelink purposes under the older "return of capital" rules rather than the deeming method that applies to all newer account-based pensions. This grandfathering can produce meaningfully higher Age Pension payments — sometimes thousands of dollars per year — compared to what deeming would produce. It can also be lost permanently by specific restructuring events that retirees and their advisers do not always recognise. Understanding whether your ABP is grandfathered, and what can break the grandfathering, is important before making any changes to your superannuation structure.
What was the 2015 reform and how does the grandfathering rule work?
Before 1 January 2015, account-based pension payments were assessed for Centrelink income test purposes using the "deductible amount" (return of capital) method. Under this approach, only the portion of each payment representing a return above the original purchase price — broadly the earnings or investment return component — was counted as assessable income. The capital repayment portion of each payment was deducted, reducing the assessable income figure.
From 1 January 2015, the Social Security Legislation Amendment (Fairer Means Test for Account Based Pensions) Act 2014 changed the treatment for new account-based pensions: they are now assessed under deeming, in the same way as other financial investments. Deeming applies the standard rates (1.25% on the first $64,200 for singles and 3.25% on the balance above that, as of FY2025-26, per DSS Guide 4.4.1.10) to the account balance, regardless of how much the member actually draws down.
The grandfathering rule, confirmed in the DSS Guide, preserves the older treatment for ABPs held by income support recipients immediately before 1 January 2015. Both conditions must be met: the ABP must have commenced before that date, and the holder must have been receiving an income support payment (Age Pension, or another qualifying payment) immediately before 1 January 2015. Where both conditions are satisfied, the pre-deeming return-of-capital assessment continues indefinitely — provided the grandfathering is not broken by a subsequent event.
When does grandfathering produce material value?
The difference in assessed income between the two methods depends on the relationship between the account balance, the investment return, and the pension drawdown. For a retiree with a large ABP drawing modestly above the minimum, the return of capital method typically produces lower assessable income than deeming would — because deeming assumes a return (at the deeming rates) on the full balance, while the deductible amount method is based on the original purchase price amortised over life expectancy. As the balance grows relative to the original purchase price, or as deeming rates exceed the actual deductible amount yield, the grandfathering advantage increases. For long-retired pensioners who commenced large ABPs in the early 2010s, the value of grandfathering can be substantial. For ABPs with small balances, the difference is typically modest.
How is grandfathering lost?
Grandfathering is permanently lost by several events.
If the Age Pension or other income support payment is cancelled — because assessable assets or income exceed the means test limits — and later re-applied for, the grandfathering does not return. The new claim is assessed under current (deeming) rules. This is perhaps the most common way grandfathering is accidentally lost: a pensioner's assets or income rise above the threshold for a period, the pension is cancelled automatically, and when the position later brings them back into eligibility the new assessment is under deeming.
Rolling the ABP into a new pension — whether to change funds, consolidate, or restructure — commutes the existing pension and starts a new one. The new pension is assessed under deeming; the grandfathering from the old pension is gone. Even transfers to a different fund for better fees or investment options should be assessed against the grandfathering loss before proceeding.
Commuting the full ABP balance and withdrawing or rolling to accumulation phase, and changing the pension product type, are similarly disruptive. Any event that results in the existing grandfathered pension ceasing and a new pension commencing breaks the chain.
How does a reversionary pension affect grandfathering for a surviving spouse?
For couples, a grandfathered ABP set up as a reversionary pension — where the pension automatically continues to the nominated surviving spouse on the holder's death — may preserve grandfathering for the surviving spouse, subject to conditions. The surviving spouse must be receiving an income support payment at the time the pension reverts, and the reversion must be automatic rather than requiring the surviving spouse to apply for a new pension. Where these conditions are met, the surviving spouse continues with the grandfathered assessment. For couples where this is relevant, specialist advice on the reversionary structure before any changes is important.
How should retirees decide whether to preserve or restructure a grandfathered ABP?
Grandfathering is not a reason to remain in an unsuitable ABP indefinitely. If the grandfathered fund has materially higher fees, poor investment options, or significant administrative disadvantages, the annual cost of those problems may exceed the annual value of the grandfathering concession. The right approach is to model both: quantify the annual Age Pension advantage the grandfathering produces, and compare it against the annual cost of remaining in the current structure. If restructuring produces a net benefit even after losing the grandfathering, it may be the right decision. If the grandfathering advantage exceeds the restructuring benefit, preserving it is typically worth the inconvenience of staying in the current fund.
For any retiree who is uncertain whether their long-held ABP is grandfathered, Services Australia can confirm the specific assessment basis. The Centrelink income support letter may also reference a "deductible amount" — a visible indicator of the return-of-capital assessment.
Key takeaways
- ABPs commenced before 1 January 2015 by holders who were receiving an income support payment at that time may be grandfathered, meaning Centrelink continues to assess them under the pre-deeming return-of-capital (deductible amount) method. Both conditions must be met: the ABP commenced before 1 January 2015, and the holder was receiving income support immediately before that date.
- Under the grandfathered return-of-capital method, only the earnings component of each pension payment is assessable income — the capital repayment portion is deducted via the deductible amount. Under deeming (which applies to all post-2015 ABPs), Centrelink applies the standard rates to the full account balance regardless of actual drawdown. For retirees with large balances drawing modestly, grandfathering typically produces lower assessable income and higher Age Pension entitlement.
- Grandfathering is permanently lost if: (a) the holder's income support is cancelled and they later reapply — the new claim is assessed under deeming; (b) the ABP is commuted and a new pension commenced, even in a different fund; or (c) the pension product type is changed. Any event that results in the grandfathered pension ceasing and a new one commencing breaks the concession irreversibly.
- A grandfathered ABP that reverts automatically to a surviving spouse on the holder's death may preserve the grandfathering for the surviving spouse, provided the surviving spouse was also receiving an income support payment at the time of the reversion and the reversion is automatic rather than requiring a new application.
- Grandfathering is not a reason to stay in an unsuitable ABP indefinitely. The right approach is to model the annual Age Pension advantage the grandfathering produces and compare it against the annual cost of remaining in the current structure (fees, investment performance). If restructuring produces a net benefit even after losing the grandfathering, it may be the right decision.
Frequently asked questions
How do I know if my account-based pension is grandfathered?
Your Centrelink income support assessment letter may reference a deductible amount applied to your pension income — this is the visible indicator of return-of-capital (pre-deeming) assessment. You can also contact Services Australia directly to confirm the specific assessment basis for your ABP. If your pension commenced after 1 January 2015, it is not grandfathered. If it commenced before that date but you were not receiving an income support payment immediately before 1 January 2015, it is also not grandfathered.
What happens to grandfathering if I switch to a different super fund?
Rolling an ABP to a new fund commutes the existing pension and starts a new one. The new pension is assessed under deeming — the grandfathering from the old pension is permanently lost. Even transfers made solely for better fees or investment options trigger this consequence. Before switching funds, the annual value of the grandfathering concession should be quantified and compared against the annual benefit of the proposed restructuring to determine whether the switch makes financial sense.
Does grandfathering continue if I lose the Age Pension and requalify later?
No. If the Age Pension or other income support is cancelled — because assets or income exceed the threshold — and you later reapply, the new assessment is under deeming. The grandfathered treatment does not return. This is a common way grandfathering is accidentally lost: a temporary increase in assessed assets or income causes the pension to cancel automatically, and when circumstances change the reapplication is treated as a new claim under current rules.
Is a grandfathered ABP always better assessed than under deeming?
Not necessarily. For smaller balances, or where the deeming rate is low relative to the deductible amount, the difference may be minimal or deeming may even produce a lower assessable income figure. The grandfathering advantage is greatest when the account balance is large relative to the original purchase price, drawdown is modest, and deeming rates are relatively high. For any specific case, modelling both methods against the current balance, drawdown, and deeming rates is the way to determine whether grandfathering is producing a material benefit.