Allocated Pensions Are They Right For You?

An allocated pension is a tax-effective retirement income stream created from funds in superannuation. They have been very popular with retirees in recent years but before you use one it is important that you understand how they work.

Tax advantages of an allocated pension

There are three tax advantages of an allocated pension. All earnings and capital gains are tax free so your money lasts longer.

Secondly, if you paid your own money into your superannuation fund (called undeducted contributions), you will get this back in the income stream tax free.

And lastly, the taxable part of the income from the allocated pension will usually qualify for a 15% tax offset. This means you could draw at least $24,000 a year and pay no tax. If you had undeducted contributions in your fund, the tax free income could be even higher. Of course, you will need a significant sum invested to be able to draw this level of income.

Advantages of an allocated pension for age pensioners

Centrelink and DVA assess your assets and income to work out how much pension you would get. Under the assets test, an allocated pension is treated just like other investment assets like cash, shares and so on. But under the income test, only part of the income you receive from your allocated pension is counted. So if your age pension is determined by the income test, you get more.

Other advantages of an allocated pension

An allocated pension is flexible – you can vary the income you draw each year (within defined limits) and make lump sum withdrawals. The amount you can draw each year must be between a minimum and maximum figure that are re-calculated each 1st July.

However, unlike a lifetime pension, an allocated pension is not guaranteed. It is designed to last to your life expectancy but how long it lasts in practice will depend on investment earnings and how much you draw as an income (and as lump sums). Nobody knows what their life span will be and there is an increasing danger that you may outlive your life expectancy (in relation to outliving your money, that is!). Ideally, drawing an income nearer to the minimum will make your pension last longer.

When you die, the amount left in your account passes to your estate, or your spouse can carry on with the allocated pension.

With an allocated pension, you choose the investments. Because an allocated pension is intended to last a long time, use of growth assets is usually suggested. The falls in share market values in the last three years have worried some investors, however, you can choose your own mix of investments using cash, fixed interest, property and shares. One common strategy is to draw your pension income from cash and fixed income investments and leave more growth-oriented investments untouched. This avoids crystallising losses on growth investments and allows the time to recover.

Just like any other investment, allocated pensions need to be reviewed to ensure they are meeting your needs.

To find out more and make the best of their flexibility and to maximise how long they last, talk to Grant Hodgins, Director.