A couple visited Justsuper to enquire about preparing documentation for commencing an allocated pension. The fund had originally contained $600,000 of shares yielding 7.0%. However, with retirement looming, the couple realised an allocated pension based on their assets would only be $31,090 pa and that wasn't going to be enough to support their lifestyle.

Subsequently, their accountant advised them that they could transfer into the fund a debt free commercial property they owned through their business. The transfer would be
in-specie and the value of the property would be treated as an undeducted contribution.

The market value of the property was $1,000,000 and was paying $30,000 pa in rental income.

The addition of the property increased the fund's accumulation to $1,600,000, providing for an $82,900 pa pension.

Unfortunately, the accountant who advised the couple had not checked the cashflow position of the fund's assets. At 7.0% the shares were generating $42,000 pa, whilst the property was yielding $30,0000 pa. This created a cash shortfall of $10,900, as the pension to be paid was $82,900 pa.

The parties had failed to realise that while pension incomes are determined from the value of the fund's assets, the assets themselves must generate the cashflows to pay the pension.

The couple were caught in the familiar situation of property yield not keeping pace with property value. This is an annoying situation at the best of times, but a much worse situation when you are basing a pension on the value of underlying assets.

Given the circumstances the couple's only short-term solution was to sell shares, which of course reduced their liquid assets and would eventually lead the fund to running out of readily realisable capital. Ultimately, the Trustees would be compelled to sell the property if an increased rental yield could not be achieved.