Allocated Pension versus Account Based Pension

Allocated Pensions is a partially outdated term that refers to an income stream provided by accumulated superannuation funds upon retirement. This type of pension was prevalent within an industry super fund, retail super fund or self managed superannuation fund (SMSF) amongst others. In order to draw the income from the allocated pension, a calculation based on minimum and maximum life expectancy income factors would be made. And then each financial year, the pension recipient would be required to withdraw an income that was between these minimum and maximum thresholds.

So, how long would the allocated pension income last through retirement? Simply put, there isn’t a guarantee of income – it’s dependent on the earnings within the account and the level of income that is withdrawn. Once the funds are gone the pension payments will cease.

However, in 2007 Account Based Pensions were introduced and these effectively replaced Allocated Pensions.

In essence, there is no difference between Allocated Pensions and Account Based Pensions. All rules relating to Allocated Pensions prior to the existence of Account Based Pensions were automatically transferred to the same rules as the new Account Based Pension. And whilst the allocated pension is an outdated term, it is still widely used. Many superannuation and income stream providers still refer to Account Based Pensions as Allocated Pensions.

Much of this is down to the fact that both terms, Allocated Pension and Account Based Pension, can be (and are) used interchangeably.

So let’s take a look at what the rulings are around the newer, up-to-date Account Based Pension.

There are minimum and maximum amounts you can withdraw from your account on an annual basis – this is set by the government and is due to the tax free status of these earnings.

The minimum and maximum withdrawals that are set for your account are based on your age – and the table below, from Australian Securities and Investment Commission (ASIC) shows the details. The government ruling on withdrawals from the Account Based Pension is as follows: “If you have met a condition of release the maximum you can withdraw is the account balance, however if you are still working and are using a transition to retirement pension you will be limited to withdrawing a maximum of 10% of the balance each year.”

A condition of release is a nominated event you must satisfy to be able to access superannuation savings. Examples include permanently retiring from the workforce after reaching preservation age, reaching age 65 or becoming totally and permanently disabled.

[source: www.moneysmart.gov.au]

The purpose of account based pension is that it is a form of tax effective investment so that you can have access to money at a stage in your life when you’ll likely need it most – but it is not a guaranteed income stream and it is you who controls it. So care must be taken to ensure that your income will provide for you throughout the duration of your retirement.

Your Account Based pension is separate from your Aged Pension and you may be able to use both as a combined income.

“Your Age pension entitlement is determined by an income test and an assets test. Your pension balance will be counted as an asset under the asset test. The balance will also be deemed under the income test. The test that results in the lowest Age pension being paid to you is the one that Centrelink will apply.

If you started your account-based pension before 1 January 2015, and were already receiving a Centrelink pension or allowance, then only part of your pension income will be assessed under the income test. If you commenced your pension on or after 1 January 2015, then the whole balance will be deemed for income test purposes.”
[source: www.moneysmart.gov.au]

You can close it and take a lump sum payment, but if you do so you may not be able to restart again.

Your access to income from the Account Based Pension is based on your preservation age – and this is dependent on when you were born. The table below from the government gives you the guidelines.

[source: www.smartmoney.gov.au]

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