News & Information

Allocated Pensions. What are they?

June 09, 2016

Allocated Pensions are products generally used by people in retirement that convert accumulated Superannuation funds into an income stream payable to the member.

The income stream from allocated pensions can be set to pay you at regular intervals of your choice. Generally, most allocated pensions provide for weekly, fortnightly monthly income amounts. There are also times when an annual lump sum payment may be appropriate. This will be covered a little later in this summary.

Allocated pension income amounts are generally calculated by taking into consideration a few factors including your life expectancy (whether using the ABS tables or based on familial past experiences) and the amount of the lump sum you have accumulated in Superannuation. When considering a person’s income streams in retirement, LifeTime Financial Group also takes into account the likelihood of an individual being more active in the earlier part of retirement, thereby needing more income in the earlier years and less income as the client becomes less active in older age.

By using the above approach to calculating an income stream in retirement, an individual can transition into retirement comfortable in the knowledge that their funds will last the distance.

Generally allocated pensions offer very attractive tax incentives including a tax free income post the age of 60. All investment earnings, interest earned in cash accounts, dividends and capital gains are tax free. Where a dividend has a franking credit attached, the taxed element is returned to the income stream. This is obviously very different for those who are investing outside of the Superannuation rules where all of these are taxable at the individual’s marginal rates.

Whilst allocated pensions are established with the longer term in mind, in most cases, an individual should be able to access either some or all of the funds should the individuals priorities change. Remember that once the funds are taken out of the allocated pension and placed into a bank account, the funds are no longer considered part of the tax free benefits associated with allocated pensions funded from Superannuation.

I noted earlier that there are times when an individual will require access to lump sums on an annual basis. The ATO has made comments in relation to this and would prefer to see regular income payments throughout the course of the year.

Not all recipients of allocated pensions are retired. In fact, LifeTime Financial Group actively seek out clients who are in the workforce and who are over the age of 60. These people can commence an allocated pension using their existing accumulated funds (creating a significant tax free assets) whilst still accumulating benefits in Superannuation. The income received from the pension income, although not required for day to day living, can then be redirected back in to the Superannuation account as a Non Concessional Contribution. This can have benefits around estate planning as well as reducing the effective tax rates on Superannuation by holding the asset in Pension phase.

Finally, the use of income streams to further boost Superannuation accounts using a Transition to Retirement strategy can be significant for those who are not currently contributing at the maximum deductible contribution limits.

For more information or a meeting with someone qualified to provide you with quality advice in relation to allocated pensions, please contact us on 03-95967733.