Allocated Pension

What does it mean?

An allocated pension is a product purchased by retirees to convert their super savings into a regular income. Retirees use allocated pensions to pay themselves an income over a time period roughly equivalent to their life expectancy. Pension payments can be made monthly, quarterly, half yearly and yearly and are deposited directly into a retiree's bank account.

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Allocated pensions are by far the most popular product around for retirees looking to live off their super savings in retirement.

So why are allocated pensions so popular? Why don't retirees just withdraw their funds out of super and dump the lot into a term deposit or savings account, or even use their super to buy other investments such as an investment property or shares?

The major reason here is tax. Allocated pensions save you tax compared to most other strategies in retirement. That's because any investment earnings in an allocated pension - interest, dividends, capital gains - are tax free (age 60 and above). In comparison, interest made on a term deposit or rent received on an investment property held outside the super environment are subject to tax at the retiree's marginal tax rate.

When a retiree buys an allocated pension to house their super savings they don't have to say goodbye to the money forever. At any time, you can opt to withdraw all, or part, of your money from an allocated pension by simply filling in a couple of forms (check to see if there are any restrictions on the number of lump sum withdrawals allowed each year). You may use the money to buy a business or property, or to go on an overseas trip. Some retirees assist their children to buy a house. The allocated pension offers this needed flexibility.

So how much does an allocated pension pay? Well, that depends on how much you have to start with, and how old you are. The Government sets minimum limits, which are calculated when the pension is established and recalculated at the beginning of each financial year.

You can change the amount and frequency of your pension payments whenever you need to, but you can't turn an allocated pension on or off like a tap. Once started, you must receive at least the minimum payment each year. The pension ceases when the account balance hits zero.

Allocated pensions aren't just cash accounts. Retirees have a raft of investment choices at their fingertips including Aussie and international shares, managed funds, listed property, fixed interest and cash. The aim of an allocated pension is to not simply eat into your capital, but to actually make money in retirement as well. Retirees drawdown a combination of capital and investment earnings to live on. Clearly, the more money you make on your investments, the longer your retirement money will last - and the more holidays you can enjoy.

Allocated pensions are not just popular with retirees (those who are permanently retired and have reached preservation age). Pre-retirees, over age 55, looking to boost their super before retiring completely often buy allocated pensions in order to undertake the transition to retirement strategy. You can read more about this popular strategy below.

Transition to Retirement Pension

What does it mean?

A transition to retirement pension is a flexible way to move from work to retirement. On reaching your preservation age (generally 55, but is increasing over time and may be 60 if you were born after 30 June 1964), you can start accessing super (including the preserved portion) via a super pension while maintaining or reducing work hours.

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Many individuals nearing retirement are looking for ways to boost their super savings. With the introduction of government’s simpler super reforms in July 2006, it is now possible to do exactly this by making the most of transition to retirement (TTR) rules.

You can take advantage of the transition to retirement rules by salary sacrificing part or all of your employment income into super, while at the same time beginning an allocated pension from your existing super funds. The pension provides an income while you continue working, and is tax free for individuals over 60, and carries a 15% tax rebate if you're aged between 55 and 60.

At the same time you're getting considerable tax benefits from salary sacrificing your income into super, paying only 15% contributions tax, as opposed to PAYE income tax rates of up to 45%.

So at what age is this strategy of most benefit? Most advisers agree that it best suits someone aged 60 or more, or at the very least age 55. Between now and 30 June 2012 an individual can take a pension income stream tax-free and make contributions (both salary sacrifice and employer contributions) up to $100,000 per annum.

To begin a TTR strategy, you must have reached ‘preservation age’, in order to access super benefits. This is age 55 if you were born before 1 July 1960, phasing to age 60 for those born after 30 June 1964.

Due to the reduced cash flow, anyone thinking about the TTR strategy should have no debt.

Not all super fund providers offer TTR arrangements.

The fees of setting up a TTR arrangement should be minimal – and if you are able to set up the scheme yourself, no costs should be incurred at all. Once you reach retirement age, the commutation of the TTR pension back to accumulation phase is also allowed and should be at a minimal cost.

Before deciding on whether to set up at TTR strategy, you firstly have to find out what your pension is worth, then check the numbers on your living costs and see if the after-tax income of the pension will cover your needs. Then you need to make an application to the super fund for the pension to commence, and notify your payroll office of your decision to salary sacrifice to superannuation.

The TTR strategy has the Australian Taxation Office stamp of approval, which has stated that it will not apply anti-avoidance provisions where this strategy is employed. The ATO notes: "We would only be concerned where accessing the pension or undertaking the salary sacrifice may be artificial or contrived."

his information is of a general nature only and doesn't constitute personal investment advice.

Pension Phase

What does it mean?

Many retirees convert their retirement savings to a pension upon retirement due to the considerable tax benefits available in the pension phase.

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Once retired, you have the choice of retaining your funds in super (in the accumulation phase) or converting your funds to a pension, such as an allocated pension.

Taxation payments will be higher if you leave your assets in a super fund compared to a pension. In the accumulation phase, earnings on a super funds are taxed at up to 15 per cent. But once a fund converts to paying a pension, there is no tax payable on the earnings. Additionally, if you are aged over 60, any pension drawdowns are also tax free.

Let's say that your account balance is $500,00 and generates 8 per cent ($40,000) assessable earnings. Assuming half of this is income, and the other half realised capital gains, then the tax payable would be around $5,000. If the account had been converted to the pension phase, then the tax would be nil.

One possible downside of commencing a pension is that you may not need the minimum level of income that you must draw down. For instance, you may have income from other sources, such as investments in your names or employment income.

And once a pension is commenced, it is no longer possible to add extra contributions.

The costs charged by the product provider when making the switch from accumulation to pension phase will vary, but are impossible to avoid once you've decided to cash in your super assets. But it is vital that you shop around when looking for a retirement income product, as fees and charges can range enormously.

Pension

What does it mean?

The ATO website describes a pension as: "A series of regular payments made as an income stream, this may be provided by a superannuation fund or retirement savings account (RSA)"..

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Since the introduction of the Government’s “simple super” regime on 1 July this year, it is no longer a mandatory requirement for retirees to convert their superannuation assets to a pension arrangement. This means, in effect, that if you don’t need the regular income a pension provides to pay the bills, you can leave your cash in accumulation phase indefinitely.

This change has largely been driven by the Government’s recognition that many people wish to keep working, and contributing to their pension pot, past retirement age. The additional benefit for Government is that people who do so may be less reliant on social security benefits when they do eventually stop work.

Taxation payments, however, will be higher where an individual leaves their assets in a super fund. The main difference between the accumulation phase and the pension phase relates to the tax treatment of the earnings within the fund. In the accumulation phase, earnings on a super funds are taxed at up to 15 per cent.

Once a fund converts to paying a pension, there is no tax payable on the earnings. If a member had an account balance of $500,000 and generated 8 per cent ($40,000) assessable earnings, and assuming half of this is income, and the other half realised capital gains, then the tax payable would be around $5,000. If the account had been converted to the pension phase, then the tax would have been zero.

So any investment earnings within a pension funds are tax free. Additionally, if you are aged over 60, any pension drawdowns are also tax free.

But once a pension is commenced, it is no longer possible to add extra contributions, so this will ultimately be the make or break decision for most people at retirement age

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