A Non Commutable Allocated Pension (NCAP) is an income stream that is commenced using your superannuation savings.
It is Non-Commutable because only pension payments are able to be received from this type of income stream. You are unable to make lump sum withdrawals (commutations) from the capital value of the pension.
Don’t let this confuse you
At the risk of confusing the matter further, I will try to elaborate on this point.
When I say that you are unable to make lump sum withdrawals from the capital value of the pension, I do not mean that you are limited to drawing only the income generated from your superannuation investments (i.e. bank interest, share dividends, rental income, managed fund distributions, etc.). The capital value of your investments is different to the capital value of the pension.
Why would you commence a Non Commutable Allocated Pension?
A Non Commutable Pension is the only type of pension that you are able to commence if you wish to commence a Transition to Retirement strategy. This is the type of strategy that you would employ if you have reached your Preservation Age, yet under age 65 and continuing to work.
A Non Commutable Allocated Pension requires you to draw an income of between 4% and 10% of the account balance, as calculated on 1 July of each year, or at the commencement date of the pension (pro-rata). Here’s an example of how a Non-Commutable Pension works.
What’s the difference between a Non Commutable Allocated Pension and an ordinary Allocated Pension
There are only two differences between these types of pensions:
- Lump sum withdrawals from the capital value of a Non Commutable Pension are not permitted, whereas they are permitted with an ordinary Allocated Pension
- The maximum pension income that can be drawn from an ordinary Allocated Pension is not limited to 10% p.a. In fact, the maximum income that you can withdraw from an Allocated Pension is not limited at all – you can draw 100% of your balance as a pension payment in any year.
Everything else remains the same between these two types of pensions – they both require a minimum pension income to be drawn each year, all investment earnings are received tax free, etc. etc.
All in all, a Non Commutable Allocated Pension is the more technical term for a TTR Pension/Transition to Retirement Pension/Transition to Retirement Income Stream.
(Note: Allocated Pensions have since been replaced by Account Based Pensions. Therefore now referred to as Non Commutable Account Based Pensions)
Account Based Pensions and Non-Commutable Allocated Pensions both also receive a deductible amount, which reduces the income for Centrelink purposes; provided the NCAP commenced prior to 1 January 2015. The Centrelink Deductible Amount formula can be found here.
What type of account do I need to commence a NCAP?
You are able to commence a Non-Commutable Pension if you have an accumulation account (and have reached your Preservation Age).
Accumulation accounts are generally available within the following types of superannuation accounts:
- Industry Superannuation Accounts
- Corporate Superannuation Accounts
- Retail Superannuation Accounts
- Self Managed Superannuation Accounts (SMSF)
More information on these types of accounts can be found in my explanation of ‘What is Superannuation?’.
If you would like anything clarified or have any further questions in relation to Non Commutable Allocated Pensions or any other superannuation topics, please do not hesitate to leave a comment.
