Term Allocated Pensions

Written on the 30th of November 2009 by Continuum Financial Planners Pty Ltd

What is a term allocated pension?

A term allocated pension is a superannuation account that provides for your super to be paid to you as regular income for a fixed period. They can commence after retirement or as part of a “transition to retirement”. The pension payments made to you are set each year based on your account balance and the term remaining on your pension. After a 6 month cooling off period it cannot be commuted to a lump sum.

A term allocated pension is paid for a fixed term that is decided at commencement. This term must be for at least your life expectancy (rounded up) but can be increased for any whole number of years up to when you, or your spouse, attain 100.

Important Note: Only term allocated pensions commenced before 20 September 2007 will be eligible for the 50 per cent Centrelink exemption. If you commenced a term allocated pension prior to this date, you can roll it over to a new term allocated pension after 20 September and retain the 50 per cent exemption.

You can hold a range of assets in your term allocated pension account, including managed investments, fixed interest and cash, depending on the investment strategy you are comfortable with.

A term allocated pension account can also provide you with major tax savings.

Benefits

No tax is paid on any returns earned by the investments in your account. These tax-free earnings remain in your account to increase the value of your investment, so you can potentially receive more income with each payment from your term allocated pension.
Investing your superannuation straight into a term allocated pension enables you to defer the payment of lump sum tax, possibly indefinitely.
Payments from your term allocated pension account are tax free if you are over 60. If under 60, payments are assessed at ordinary marginal tax rates, but if you are over 55 or permanently incapacitated, you are also entitled to a tax rebate of up to 15 per cent on the assessable portion of the pension payment.
Non-concessional contributions are returned to you tax-free over the life of your pension. These are contributions that you or your spouse made into superannuation on your behalf and for which no tax deduction was claimed.
Generally, Centrelink treats only a small part of the income received from a term allocated pension as income so you may still be eligible for social security payments.
Selling investments with unrealised capital gains while in the pension phase will not incur CGT.

Flexibility

Choose your investments with your adviser, according to your personal risk profile. By investing in long-term growth assets, any returns made should, over time, result in an increase in the value of your investment.
Vary the frequency and timing of each payment, depending on your changing needs. This is useful if you are balancing your term allocated pension income against other income sources.
You can vary the annual prescribed payment by plus or minus 10 per cent.

Estate planning

On death, a term allocated pension can be paid as a death benefit to a dependant. Alternatively, a tax dependant (generally spouse or child under 18) can elect to commence a reversionary income stream with the account balance.

A binding reversionary term allocated pension will continue to the reversionary and cannot be commuted on death of the first pensioner. Hence, term allocated pensions can be a good way to secure an income stream for your spouse, giving you peace of mind.

What now?

If you see a need for a pension of this type, contact us now to arrange a consultation with one of our advisers at Continuum Financial Planners Pty Ltd: the first such meeting will be at our cost!