An Allocated Pension income stream (also known as an account based pension) is an income stream commenced using your accumulated superannuation savings.
An Allocated Pension is currently the most common form of income stream used by retirees.
Here’s how it works.
Allocated Pensions Explained
Over your working life you will have built up superannuation savings within a superannuation accumulation account, through superannuation contributions.
Such contributions may have included compulsory employer superannuation guarantee (SG) contributions, salary sacrifice contributions, self-employed contributions or after-tax contributions.
Upon reaching your superannuation preservation age, you then have the ability to start an Allocated Pension income stream using some or all of your superannuation accumulation savings, provided you have met a full superannuation condition of release.
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Allocated Pension Rules
Once you have commenced an Allocated Pension, there are certain rules associated with the income stream.
An Allocated Pension is an income stream that provides you with a source of income from your superannuation account into your personal bank account.
You are required to draw a minimum pension payment, which is calculated based on your account balance and pension income payment factor.
Your minimum pension income payment factor is based on your age, as follows:
| Age | Minimum Pension Factor |
|---|---|
| Under 65 | 4% |
| 65-74 | 5% |
| 75-79 | 6% |
| 80-84 | 7% |
| 85-89 | 9% |
| 90-94 | 11% |
| 95 or more | 14% |
The way your minimum pension payment is calculated in any one year is by multiplying your account balance on 1 July (or commencement) by the pension payment factor.
For example, if your Allocated Pension balance was $500,000 on 1 July 2017 and your were 69 on 1 July 2017, then your minimum pension payment for the 2017/18 financial year would be $25,000 ($500,000 x 5%).
If you commence an Allocated Pension part way through a year, then your minimum payment is pro-rata – based on the number of days remaining in the financial year.
You can rollback a pension to accumulation phase at any point.
Allocated Pension Income Tax Explained
The tax assessment of income received from an allocated pension will depend on two things: your age and the tax components of the payment.
Your pension balance can consist of up to 3 different types of components. Namely, the ‘Tax Free‘ component, the ‘Taxable (taxed)‘ component and the ‘Taxable (untaxed)‘ component.
The ratio of these components will remain static for the life of the allocated pension, based on the ratios when the pension was first commenced, expressed as a percentage (e.g. 40% tax free / 55% taxable (taxed) / 5% taxable (untaxed)).
Your balance may consist of one, some or all of these components. Many superannuation balances will not include a taxable (untaxed) component.
All withdrawals from an allocated pension must be made proportionately from each component and will be taxed as follows:
Under age 60
| Component | Tax Rate |
|---|---|
| Tax Free | 0% |
| Taxable (taxed) | MTR minus 15% rebate |
| Taxable (untaxed) | MTR |
Over Age 60
| Component | Tax Rate |
|---|---|
| Tax Free | 0% |
| Taxable (taxed) | 0% |
| Taxable (untaxed) | MTR minus 10% rebate |
MTR = Marginal Tax Rate
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Allocated Pension Earnings Tax Explained
The amount used to commence your Allocated Pension will be invested within your account. For example, if you start a pension with $800,000. This $800,000 will be invested in, say, shares, cash savings, maybe some fixed interest, property, or other investments. How your Allocated Pension balance is invested is completely up to you.
All earnings derived from the investments supporting your Allocation Pension will be received completely tax free. This includes all interest, dividends, distributions, rental income, capital gains, etc.
In comparison, all earnings within a superannuation accumulation account are taxed at up to 15%.
Allocated Pension Transfer Balance Cap Explained
From 1 July 2017, under the new superannuation rules, allocated pensions are subjected to the Transfer Balance Cap.
That is, the maximum amount that can be used to start an Allocated Pension from 1 July 2017 is $1.6 million (indexed in increments of $100,000). All other retirement funds must remain in accumulation phase of superannuation or removed from superannuation all together.
For existing Allocated Pensions on 30 June 2017, the balance in excess of $1.6 million must be commuted (rolled back) to accumulation phase of superannuation, or withdrawn from the superannuation environment completely.
Exceeding the Transfer Balance Cap can result in excess transfer balance cap tax on notional earnings. However, some transitional rules do apply.
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Allocated Pension Death Benefits Explained
When you pass away, your Allocated Pension can be paid to beneficiaries (or your estate where beneficiaries will benefit).
If the Allocated Pension was setup as a reversionary Allocated Pension, then it will automatically revert to the reversionary beneficiary without passing through your estate or being distributed as part of a binding or non-binding death benefit nomination.
If it was not setup as a reversionary Allocated Pension, the death benefit can be paid as a lump sum, an income stream, or a combination of the two. However, if the death benefit is paid as an income stream to a dependent child, the income stream must cease once the child reaches age 25, with the residual balance paid to them as a lump sum. The income stream can continue, though, if the child has a permanent disability.
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Allocated Pensions and Centrelink
The total capital value of an Allocated Pension is assessed under the ‘assets test‘ for Centrelink and aged care purposes.
The assessment of the income (pension payments) received from an Allocated Pension will depend on when the pension it was commenced.
Allocated Pension commenced prior to 1 January 2015
If your Allocated Pension started before 1 January 2015 and on 1 January 2015 you were in receipt of a social security payment or allowance, then the income received from the Allocated Pension will be assessed under the Centrelink ‘income test’ using the Centrelink Deductible Amount Formula.
If your Allocated Pension was started prior to 1 January 2015, but you were not in receipt of a social security payment or allowance on 1 January 2015, then your Allocated Pension payments will be assessed under the ‘deeming‘ provisions for ‘income test‘ purposes.
Allocated Pensions commenced after 1 January 2015
If your Allocated Pension was started after 1 January 2015, then your Allocated Pension payments will be assessed under the ‘deeming‘ provisions for ‘income test‘ purposes.
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Hi Chris,
My husband and I both receive the age pension. I work occasionally (2-3 days a fortnight ) and report fortnightly. I will turn 70 in a couple of months and I want to take the full lump sum from my super. It is a little over $100,000. We desperately need to spend a significant amount on our home as it is in need of updating so we can enjoy it in our future. My husband has $150000+ in super which as yet, has not been touched. I know that my super will not be taxed but 50% of the amount above $100000 is taxed marginally. Will this withdrawal effect our age pension significantly?
Hi Susan, generally all withdrawals made by a person aged over 60 are received tax free. The exeption to this is if your balance includes a taxed (untaxed) component. You should ask your super fund this. I’m not sure what you mean by 50% amount $100k is taxed marginally. However, to answer your question, if the withdrawal is made as a lump sum and immediately spent on your home, it should not be assessed for Centrelink purposes. In fact, you will effectively be reducing your investment assets and therefore may be eligible for more Age Pension benefits. You can see here https://www.humanservices.gov.au/individuals/topics/lump-sums-while-income-support/28961 that Centrelink do not assess one-off lump sum withdrawals as income, just ensure it is not taken as pension payment if you have a grandfathered pension.
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Hello Chris.My wife and i ,both age 82 closed our self managed a/c based pension fund last year.
we transferred $300K to Australian Super income stream pension fund
We were receiving monthly payments which were funded by the earnings until the covid -19 panic and our balance was being eroded.
I ,too was in a state of panic and closed our accounts an now have our capital in term deposits going nowhere .
Can we restart a pension fund with another Industry fund by transferring the amount withdrawn from Australian Super ? Thanks Des SULLIVAN.
Hi Des,
You are unable to contribute these funds back into a pension fund, due to your age. It’s unfortunate, because all investment earnings within a pension account are received tax free. However, there is a way you can invest these funds in a similar fashion and receive a regular income, just as you were with your pension fund. I would strongly suggest discussing your options with a financial planner. If you do not have one, please feel free to make a free complimentary appointment with us using this appointment link https://calendly.com/torowealth/15mincall
Regards,
Chris