Making sense of allocated pensions

June 24th 2022 | Categories: Retirement |

Approaching retirement?

If retirement is on the horizon, you’ve probably heard about an allocated pension (also known as an account-based pension and retirement account) as one of the income stream options available.

We’ve answered some of the commonly asked questions about allocated pensions to help you navigate your way.

What is an allocated pension?

An allocated pension is a regular income stream drawn from your superannuation savings. Typically you can access your super once you’ve reached preservation age.

Your preservation age will be between 55 and 60 depending on when you were born.

It’s also worth noting that as allocated pensions are based on the amount you have saved in your super they do not guarantee an income for life. If you want to ensure you don’t outlast your money, our super simulator can help.

Are there limitations to how much money I can withdraw?

Typically, there is no limit to how much you can withdraw from an allocated pension. So, in addition to receiving periodic income stream payments, you can choose to withdraw some or all of your money as a lump sum.

Each year however you’ll need to withdraw a minimum amount. This figure is calculated based on your age and will be a percentage of your account balance. The table below shows you just how much.  

On 22 March 2020, as part of their response to Coronavirus, the Government announced that retirees with account-based pensions and similar products would be able to reduce their drawdown rates. This has now been extended until 30 June 2023. This measure is in response to the incredible market volatility we have witnessed.

While the other measures released were in aid of putting more money into people’s pockets in the short term, this is about reducing income streams for pensioners while reducing pressure to sell investments in a downturn. When market values drop as we have seen, limiting the number of investment units you need to sell can be an important strategy in reducing realised losses and preserving wealth. You can read more about this here.

How does a transition-to-retirement pension differ?

With a transition to a retirement pension, you can usually only withdraw periodic payments from your super savings. However, you can do so while working full-time, part-time or casually once you’ve reached your preservation age.

If you are reducing your work hours this can make up for a reduction in wages.

If you’re still working full time, however, there could be a range of tax advantages worth exploring with an adviser.

Unlike an allocated pension you don’t usually have the option to withdraw your super as a lump sum. And while there’s still a 4 per cent minimum you must withdraw each year, with a transition to retirement pension the maximum you can draw is 10 per cent each year.

What taxes will I pay on an allocated pension?

• You will not be taxed on investment earnings within your fund
• From the age of 60 you will not pay tax on pension payments you receive
• If you’re between age 55 and 60, the taxable portion of your allocated pension will be taxed at your marginal tax rate less a 15 per cent tax offset.

Whether an allocated pension is tax effective will depend on your individual circumstances.

Tax implications need consideration and to seek advice from an expert, we can help you find an adviser.

Can I also receive the government’s Age Pension?

It is possible to have an allocated pension and receive the government’s Age Pension. The value of various assets you have can determine whether you’re eligible for the Age Pension. And your income can then affect the amount you receive in Age Pension payments if you are eligible.

Allocated pensions are generally subject to the deeming rules for income test purposes, which means they are assessed the same way as financial assets (like cash, shares and managed funds). Under these rules, all financial investments are assumed to earn a certain rate of income regardless of how much income is actually generated.

The benefit of this is that when Centrelink assesses eligibility for Age Pension payments and other government benefits for those with an allocated pension, the level of income payments received from the allocated pension may be higher than the amount that is classified as assessable income under the income test.  

Source: AMP

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What you need to know: This information is provided by Invest Blue Pty Ltd (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you.