Term Allocated Pensions
Term Allocated Pensions (TAPs) – What are they?

Term Allocated Pensions/annuities also known as (market-linked pensions or annuities) are one of a number of products that can be purchased using money from a superannuation fund or a retirement savings account (the Eligible Termination Payment or ETP).

They are a market-linked fund providing an income stream with favourable Centrelink treatment. The pension provides a tax effective, regular income stream for the term of the pension.

How long does the income continue to be paid?

The Term Allocated Pension is designed to try to last as long as you selected at outset. You can choose a prescribed term or select the prescribed life expectancy assumptions for your age. Typically the longer the term you select, the lower the income payment you will receive. This enables your pension to last longer whilst keeping your assets in a tax free environment.

An investment account is set up with the money from which you receive a fixed percentage each year. The fixed percentage is based on the size of your investment fund each year and your income can go up and down in line with market movements.

For example, a $100,000 fund with 10% withdrawals each year, pays $10,000 income in the first year, but in the 2nd year, the investment fund may be $105,000, so the income would be $10,500.

Since the investment returns can differ significantly from one provider to another and you are no longer able to transfer these plans at a later date, it is important for our advisers to look at investment returns and charges as important factors in determining which TAP to recommend. Increased investment returns can significantly extend how long your TAP pays for.

You may choose how your money is invested by the fund manager (known as 'investment choice'). Since fund managers have different investment strategies that carry different levels of risk and return and you cannot transfer your TAP once it is in force, it is important that you choose the most suitable TAP for your circumstances. Advice in this area is imperative, TAPs are one of the most tax efficient ways of receiving a retirement income yet without advice you may find yourself with an unsuitable and/or expensive contract.

What are the benefits?

Term allocated pensions are a relatively flexible way to provide an income for your retirement. They are less flexible than allocated pensions but more flexible than standard annuities.

With a term allocated pension you can:

  • Vary your pension payments +/- 10% of the prescribed amount
  • Vary between monthly, quarterly, six-monthly or annual payments
  • Specify how much and to whom benefits are to be paid upon your death
  • Choose from a range of investment options.

Term Allocated pensions are also tax-effective:

  • Investment earnings within your TAP account are tax-free
  • Pension payments are taxable, but have a tax-free component
  • You may be entitled to a tax rebate

Term allocated pensions do have some disadvantages and it is important to discuss these with your planner in considering the suitability of these contracts:

  • You are limited in varying income by +/- 10% of the prescribed amount
  • There is no guarantee your pension payments will continue throughout your lifetime, taking maximum withdrawals and poor investment performance could reduce the value of your investment fund.
  • You can’t split your pension between husband and wife to reduce tax.

Whether you’re unsure of which retirement strategy is the most appropriate for you, just looking to enhance the investment returns from your current retirement portfolio or confirmation of whether your current retirement strategy is up to date with recent changes in legislation, our planners will be able to assist.  Feel free to give us a call and chat about your investments; we are real people able to give you a personalised service, not a call centre.

Setting up a term allocated/market linked pension or annuity

An important consideration when selecting a provider of a Term Allocated Pension is that the impending legislation in July 2007 does not allow a Term Allocated Pension to be commuted for the purposes of changing providers. Since you cannot transfer a term allocated pension once it has been set up, it is important to ensure that you seek advice as to the most suitable pension provider.

Term Allocated Pensions are tax efficient investments

Income from a term allocated/market linked pension is taxable. However, when your income is paid, part of this is considered to be a return of your income. Where you have already paid tax on the contributions, this portion is tax free, the remainder is deemed taxable.

For income streams purchased with superannuation money only, an additional tax offset of 15% may also apply to some or all of the income stream. This rebate will reduce your tax payable (In most cases, you must be over age 55 to be eligible for the offset).

Term allocated/market linked pensions and annuities are complying income streams. As a complying income stream, a market-linked pension or annuity can allow you to gain access to the higher pension Reasonable Benefit Limit (RBL).

By structuring your investment portfolio correctly and utilising these investment products as part of a structured advised investment strategy, we are confident in being able to maximise your returns whilst reducing your potential tax liability.