What are term allocated pensions?
…or perhaps the question is becoming – What were Term Allocated Pensions?
A term allocated pension (TAP) is a superannuation account that provides for your super to be paid to you as regular income for a fixed period. They were able to commence after retirement or as part of a “transition to retirement”. The pension payments made to you under a TAP are set each year based on your account balance and the term remaining on your pension.
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 Notes:
1. Only term allocated pensions commenced before 20 September 2007 are eligible for the 50 per cent Centrelink exemption in determining social security benefits. If you commenced a TAP prior to this date, you can roll it over to a new TAP after 20 September and retain the 50 per cent exemption.
2. Whilst existing Term Allocated Pensions are able to continue, this form of superannuation pension is no longer available for commencement.
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 of Term Allocated Pensions
- 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 TAP.
- Investing your superannuation straight into a TAP enables you to defer the payment of lump sum tax, possibly indefinitely.
- Payments from term allocated pension accounts 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 Capital Gains Tax (CGT).
Flexibility characteristics
- 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 relative value of your investment (allowing for the regular pension drawdowns).
- 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 have, or inherit, a pension of this type, phone our office of 07-3421 3456 or complete and submit the contact us form on our website now, to arrange a consultation with one of our advisers at Continuum Financial Planners Pty Ltd to seek advice as to how you can maximise the benefits that endure with this type of account.
Acknowledgement: we have taken substantive portions of the above article from the Information Section of the advice document templates available to us through our association with Securitor Financial Group Ltd and appreciate their permission to use this information.
(This article was originally posted in November 2009: it has occasionally been updated/ refreshed, most recently in February 2020.)
