A Closer Look at Term Allocated Pensions

What are Term Allocated Pensions?

Term Allocated Pensions are a type of ‘complying’ retirement income stream that is payable from a superannuation fund and has been available since 20 September 2004.

They allow underlying investment in growth style assets while still receiving favourable treatment for social security and reasonable benefit limit purposes.

Anyone with accessible superannuation monies can purchase a Term Allocated Pension. They can be purchased direct from a product provider or fund manager and can also be commenced in a self managed superannuation fund.

Term Allocated Pensions are referred to as ‘complying’ income streams due to their concessional treatment for social security purposes where they are partially exempt (50%) from the assets test and also due to their ability to be assessed against the higher Pension RBL.

You may also hear Term Allocated Pensions referred to as ‘market-linked pensions’ or ‘growth pensions’. This is because the underlying assets can comprise a range of different asset classes including ‘growth’ type assets such as shares and property. Historically, complying income streams offered by fund managers have necessarily been backed by fixed interest style investments due to the guaranteed nature of the retirement income.

How do Term Allocated Pensions work?

Term Allocated Pensions operate quite similarly to a bank account. Investment earnings top up the account balance while it is reduced by withdrawals in the form of regular pension payments.

If you are familiar with the ordinary Allocated Pension, Term Allocated Pensions operate with a similar account type arrangement.

A Term Allocated Pension provides for pension payments for a fixed period based on either your life expectancy or your spouse’s (longer) life expectancy if they are a reversionary beneficiary and is designed so that the account balance is reduced down to nil by the end of the term.

The annual pension payments are calculated at the start of each year in accordance with a set formula and unlike ordinary Allocated Pensions there is no scope to select a payment amount between a minimum and maximum amount.

There is an amount of flexibility in relation to the term that you may choose for a Term Allocated Pension. The selected term must be between your life expectancy, or that of your spouse (if they are a reversionary beneficiary and have a longer life expectancy) at the date the pension is purchased.

Other key features:

    * No residual capital value left over at the end of the term.
    * Not able to be commuted (or cashed out to a lump sum), except under limited circumstances.
    * Partially exempt (50%) for the social security assets test.
    * Potential to access the higher Pension RBL.

Is a Term Allocated Pension for you?

Term Allocated Pensions can be used by retirees who wish to access the Government’s age pension and also by those in excess of the Lump Sum RBL wishing to access the higher Pension RBL. It is important to realise that this new type of ‘complying’ pension is linked to market movements and hence the account balance can (and will) fluctuate accordingly.

Due to the fixed nature of the annual pension income these pensions derive, it may be suitable to run one of these pensions side-by-side with an ordinary Allocated Pension. The ordinary Allocated Pension will allow for the previously mentioned income flexibility as well as the ability to commute a lump sum if required.

Disclaimer:

No investment advice provided to you.
This web site is not designed for the purpose of providing personal financial or investment advice. Information provided does not take into account your particular investment objectives, financial situation or investment needs.

You should assess whether the information on this web site is appropriate to your particular investment objectives, financial situation and investment needs. You should do this before making an investment decision on the basis of the information on this web site. You can either make this assessment yourself or seek the assistance of any adviser.