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John Wasiliev
 
Useful Material

 

How term allocated pensions work

In financial terminology, legacy products are those that are no longer available to new applicants, although they can continue for those who already have them. One such product is term allocated pensions (TAPs) also described as market linked pensions.

Introduced in September 2004, they were made available as an alternative to lifetime and life expectancy pensions at a time when superannuation saving was restricted by reasonable benefit limits (RBLs).

Reasonable Benefit Limits were the maximum amount of superannuation or job termination benefits that individual Australians was allowed to accumulate at concessional tax rates over a lifetime. When RBLs were abolished from July 1 2007, they stood at $678,149 for anyone planning to take their retirement benefit as either a lump sum or an allocated pension which allowed lump sum withdrawals. Where a super pensioner agreed to take half their super savings as a pension that could not be converted to a lump sum, the RBL was much higher at $1,356,291.

TAPs were therefore (and still are for those who have them) a super pension that cannot be converted to a lump sum. With the abolition of RBLs from July 1, 2007 and their replacement by contribution restrictions, TAPs ceased to have any appeal. 

But for those who still have them, they must still be run according to the rules that still apply to them. As far as TAPs are concerned, they so share something in common with allocated pensions before there were moderised into account based pension.

The annual level of income was related (and still is) to the July 1 value each year of a fund member’s investment account.

Into this you divide a number - called a pension factor from a special government list - which is based on the remaining term of the pension. This gives the annual pension income for each financial year.

The term for the pension could (or can still be) be calculated five different ways. Four of them are based on the average life expectancy detailed in official Australian Life Tables prepared by the Australian Government Actuary. A copy of the most recent tables appears below.

Term calculation Method 1 was your life expectancy according to the life tables. Method 2 for a slightly longer term was your life expectancy if you were five years younger.  So if you were 65, you could use the life expectancy for a 60 year old.

Method 3 was available to those with a younger spouse who was prepared to pass the pension on to him or her on their death. This was their spouse’s average life expectancy. Method 4 was the spouse’s life expectancy if he or she was five years younger.

Method 5, which generally delivered the longest term, was based on the assumption that you might live to age 100. This option was only available from January 2006 and allowed you to calculate a term based on 100 minus your age at your most recent birthday. So if this was 65, the chosen term could be up to 35 years (100 minus 65 = 35).

But while the term might be based on average life expectancy numbers or the age 100 calculations this is only Step 1 in the pension income calculation process.

Step 2 involved applying these terms to special TAP payment factors especially created for these pensions. A table that shows these factors appears below.

To simplify the maths, the term from the life expectancy tables are rounded up to the nearest whole number. So for a 65 year old male choosing their life expectancy as their term, the life tables number of 17.7 is rounded up to 18.

If the chosen term was the five years younger option for a member with a   female spouse aged 65, the life tables number would that for a 60 year old female of 25.44 years, rounded up to 26 years.

In the Step 2 process, you apply the rounded up term to the term remaining column in the TAPs payment factors table. If the term is 18 years, the payment factor is 13.19 which is then divided into the initial July 1 account balance. If the rounded up term is 26 years, the payment factor is 16.89 times.
If the July 1 account balance is $500,000 and the payment factors is 16.89, the required annual TAP payment is $29,600 ($500,000 divided by 16.89). Pension payments are rounded to the nearest $10.

But as the well know television commercial goes; wait there is more! Step 3 allows annual income to be varied by 10 per cent on either side of the required annual TAP payment amount. This means that a TAP super pensioner can choose to receive between 90 per cent and 110 per cent of the required annual amount. If the annual amount is $29,600, the payments can range between $26,640 and $32,560.

CURRENT AVERAGE LIFE  EXPECTANCY TABLES

 

Age

Male

Female

Age

Male

Female

50

         30.39

         34.51

76

         10.32

         12.63

51

         29.49

         33.58

77

           9.77

         11.94

52

         28.59

         32.66

78

           9.24

         11.27

53

         27.69

         31.73

79

           8.73

         10.61

54

         26.80

         30.82

80

           8.24

           9.98

55

         25.92

         29.91

81

           7.77

           9.38

56

         25.05

         29.00

82

           7.32

           8.81

57

         24.19

         28.10

83

           6.89

           8.27

58

         23.34

         27.21

84

           6.48

           7.76

59

         22.49

         26.32

85

           6.11

           7.28

60

         21.66

         25.44

86

           5.77

           6.83

61

         20.84

         24.57

87

           5.47

           6.41

62

         20.04

         23.71

88

           5.20

      6.02

63

         19.24

         22.85

89

           4.95

           5.66

64

         18.46

         22.00

90

           4.74

           5.33

65

         17.70

         21.15

91

           4.54

           5.03

66

         16.95

         20.32

92

           4.36

           4.75

67

         16.21

         19.49

93

           4.19

           4.50

68

         15.48

         18.67

94

           4.03

           4.28

69

         14.78

         17.87

95

           3.87

  4.07

70

         14.08

         17.08

96

           3.73

           3.88

71

         13.41

         16.29

97

           3.60

           3.71

72

         12.75

         15.53

98

           3.47

           3.55

73

         12.11

         14.78

99

           3.35

           3.40

74

         11.50

         14.05

100

           3.24

           3.26

75

         10.90

         13.33

101

           3.14

           3.13

             

PAYMENT FACTORS FOR TERM ALLOCATED INCOME STREAMS

Term Remaining in years

Payment Factor

Term Remaining in years

Payment Factor

50

23.46

25

16.48

49

23.28

24

16.06

48

23.09

23

15.62

47

22.9

22

15.17

46

22.7

21

14.7

45

22.5

20

14.21

44

22.28

19

13.71

43

22.06

18

13.19

42

21.83

17

12.65

41

21.6

16

12.09

40

21.36

15

11.52

39

21.1

14

10.92

38

20.84

13

10.3

37

20.57

12

9.66

36

20.29

11

9

35

20

10

8.32

34

19.7

9

7.61

33

19.39

8

6.87

32

19.07

7

6.11

31

18.74

6

5.33

30

18.39

5

4.52

29

18.04

4

3.67

28

17.67

3

2.8

27

17.29

2

1.9

26

16.89

1

1

While the above calculations assume the pension began neatly on July 1, if this was the case then the following July 1 the 26 year rounded up term based on a  five years younger option for a 65 year old female spouse would be 26 years minus 12 months, or 25 years.

The new pension factor from the TAP pension table would be that for 25 years or 16.48 which would be divided into the new July 1 account balance.

If the pension however started part way during the year then the required first year income payment would be calculated based on the proportion of the year the payment related to.

Pensions started part-way through the year must also take the first year’s term into account when determining what the remaining term will be payment for the following year.

For example if the first year’s payment related to a nine months period, the second year must be based on the first year’s term minus nine months. If it was 26 years, for example, the term for the following year is 26 years minus nine months which is rounded down to the nearest year, or 25 years.  

The rounding rules for pensions started part way through the year are: if the pension is started before December 31, the next term year is rounded down. If the pension begins after January 1, the remaining term is rounded up to the next whole year.

- By John Wasiliev

- Reviewed by Peter Crump, Portfolio Planning Solutions 

 

Accessing your super - About preservation dates

 

Under the superannuation rules you are able to access your super when you have met a 'condition of release'. Conditions of release include your retirement after you have reached your preservation age or age 65, whichever comes first. Your preservation age is when you can access super which is preserved for your retirement.

Becoming permanently disabled will get you your super before your preservation age. Preserved super will go to your beneficiaries if you die.

Your preservation age depends on your birthday. The table below is important if you were born between July 1 1960 and June 30 1964. If you were born before July 1, 1960 your preservation date is 55. If you were born in December 1961, for instance, it is 57. If you were born after June 30, 1964 you will have to wait to access preserved super until you are 60.

Accessing your super - preservation dates
Your super access date is determined by your preservation age which in turn depends on your date of birth as set out in the following table:
Date of Birth Preservation age
Before July 1, 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
After June 30, 1964 60
Source: Australian Tax office