(see also How YourShare works with Pensions and Annuities)

When you retire it is important to ensure that the product you select to take your superannuation benefits into fits your requirements. One of the ways you can invest your superannuation funds at retirement is through a pension plan, this may provide you with a regular income that can assist you through retirement. Three types of pensions are allocated pensions, complying pensions and growth pensions.

The information below is not exhaustive and is not intended for use to make financial decisions, it is as a general overview on some pension options. If you are considering retirement options YourShare recommend seeking fee-for-service financial advice. Click the link to request contact from an associated Fee-for-Service Advisor or Accountant.

ALLOCATED PENSIONS

Allocated pensions are currently the most popular form of pension available in the market today. This popularity stems from the flexibility, features, and tax advantages inherent within Allocated pensions.

Below are features of an Allocated pension:

• Allocated pensions allow members to choose the amount of pension income they receive each year within upper and lower limits set by Commonwealth legislation, depending on the amount of money invested in the allocated pension. Members may vary the amount they receive as a pension as often as they choose, provided they stay within the limits. The limits are designed so as if the maximum pension amount is taken each year the account balance would run out at age 80, and the minimum pension amount is based on an indexed pension earning a return of 3% plus the inflation rate. The minimum amount has been calculated to achieve a pension that should last for the members life span plus another three years for a reversionary beneficiary.
• Assets used to acquire an Allocated pension are treated the same as other assets (other than principle place of residence) under the Governments old age pension rules
• Members may also choose to withdraw lump sum amounts from their Allocated Pension account. These withdrawals will be treated as eligible termination payments (“ETPs”). Tax on withdrawal is computed under the rules applying to ETPs. Withdrawing a lump sum in this way is known as ‘commuting’ the benefit. A member may commute all or part of their benefits. There is no limit on the number of commutations made in a year. (currently each ETP paid on commutation contributes to the member’s reasonable benefit limit - however the RBL's were proposed to be abolished in the 2006 / 2007 budget proposals). 
• Allocated pensions have favourable tax treatment for both the member and the fund:
  - For the fund - income earned by the fund on the portion of its assets being used to fund an allocated pension is exempt from income tax. So for example any franking credits on shares allocated to paying an allocated pension would be refunded back to the fund. Or any realised capital gains (irrespective of when the gain accrued) on assets paying an allocated pension would be tax exempt.
  - For the member – of the pension paid, the un-deducted contribution component is tax free, and the income component is subject to a 15% tax rebate. For example, a total pension payment of $40,000, made up of $20,000 un-deducted contributions and $20,000 of income, is effectively tax free in the member’s hands.
• Allocated pensions usually continue until the member’s funds are exhausted or the member passes away. The length of the pension therefore depends on the age of the member, the amount in their account, the amount drawn as a pension or commuted to a lump sum and the fund’s investment performance.
• At death any amounts remaining in the members account may be paid as a pension to a dependant or in accordance with the members will, or in a lump sum to the members estate. No amounts are forfeited to the government or to any other body.
• Once the allocated pension starts any growth in the value of the funds assets is not counted against the members RBL
• The assets held within an allocated pension are subject to the investment performance of the fund, un-drawn benefits are not capital guaranteed.

COMPLYING PENSIONS

Complying pensions do not have the same flexibility as Allocated pensions. However Complying pensions do have their place in the market and may be a suitable product to select to take your superannuation benefits into upon retirement.

Below are features of a Complying pension:

• Complying pensions may either pay a pension for a fixed term, or pay a pension for life. In order to ensure a complying pension fund can meet its pension payments the underlying assets held in the fund are generally of a conservative nature.
• Complying pensions have no residual capital value,  that is there is no lump sum payable on a members passing except in limited circumstances
• From 20 September 2004 half of the assets used to pay new complying pensions are exempt from the old age pension assets test (existing complying pensions are not affected by this change) – previously all of the assets used to pay new complying pensions were exempt.
  (this is under review in the Governments Superannuation reforms and may be abolished from 20 Sept 2007)
• The rate that you are paid when you first take out a complying pension is the rate that is paid to you for the rest of the pension term. It is determined by fixed interest rates at the time of taking out the pension, and may or may not be indexed.
• After the first 6 months of a complying pension commencing a member cannot commute any portion of the pension, however members can rollover their account balance to another complying pension fund, and on the members death where a reversionary beneficiary exists commutation will occur to this beneficiary.
• There is an income tax exemption on fund income (including capital gains) attributable to assets used to pay a complying pension

(note from July 2004 SMSF’S may not start to pay a complying pension, however this does not affect existing pensions)

GROWTH PENSIONS

Growth pensions may also be known as ‘market linked pensions’ or ‘term allocated pensions’. Growth pensions are relatively new and were introduced in September 2004.

Below are features of a Growth pension:

• Growth pensions are expected to fluctuate in value more than complying pensions, due to a difference in underlying investment strategies. Growth pensions allowed fund trustees to invest in appreciating assets, instead of being limited to the more conservative income oriented assets such as bonds and fixed interest securities, in the hope of generating better investment returns long term for fund members.
• Growth pensions are similar to traditional complying pensions in terms of the governments aged pension benefits: for both growth pensions and complying pensions commencing after 20 September 2004, half the benefits are exempt from the old aged pension assets test. The higher pension RBLs apply to both growth pensions and complying pensions.
  (note the RBL's were proposed to be abolished in the 2006 / 2007 budget proposals)
• Growth pension members may choose the term of their pension within a specified range - plus or minus 5 years of life expectancy.
• The amount of the pension payment is determined by the member’s account balance on 1st July of each year divided by a payment valuation factor for the remaining term of the pension. By selecting the term of the pension the member has limited impact on their pension payment amount.
• Growth pensions may not be commuted after six months of starting except into a similar pension provided by another manager.
• Where a member passes away prematurely the benefits can either pass to a reversionary beneficiary, or to the member’s dependants or legal personal representative.

 
Please ensure you read fully the Product Disclosure Statement (PDS) of any pension, superannuation or investment product you are considering of investing in.

YourShare recommend anyone who has questions or is confused about superannuation, savings or investment to seek professional advice and contact a reputable fee for service advisor. If you would like to speak with an associated Fee-for-Service Advisors please click this link. Using a financial advisor is about paying a professional advisor to help you with your superannuation, investment and savings goals. Its not about seeing an advisor once, paying an upfront fee then also paying them for the next 10 years. Its your money make it work for you, not someone else.

For more information on managed funds please also refer to Fido, the consumer website of the Australian Securities and Investment Commissions (ASIC), under Superannuation.

Disclaimer
The information in this document reflects YourShare Financial Services Pty Ltd ('YourShare') understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. The information is not, nor is it intended to be, comprehensive or a substitute for professional advice on specific circumstances. The information given in this document is of a general nature and has not taken into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision a prospective investor needs to consider, with or without the assistance of a professional adviser whether the advice is appropriate in the light of their particular investment needs, objectives and financial circumstances.