ALLOCATED PENSIONS .... ARE THEY RIGHT FOR YOU?
An allocated pension is a tax-effective retirement income stream created from
funds in superannuation. They have been very popular with retirees in recent
years but before you use one it is important that you understand how they work.
Tax advantages of an allocated pension
There are three tax advantages of an allocated pension. All earnings and
capital gains are tax free so your money lasts longer.
Secondly, if you paid your own money into your superannuation fund (called
undeducted contributions), you will get this back in the income stream tax
free.
And lastly, the taxable part of the income from the allocated pension will
usually qualify for a 15% tax offset. This means you could draw at least $24,000
a year and pay no tax. If you had undeducted contributions in your fund, the tax
free income could be even higher. Of course, you will need a significant sum
invested to be able to draw this level of income.
Advantages of an allocated pension for age pensioners
Centrelink and DVA assess your assets and income to work out how much pension
you would get. Under the assets test, an allocated pension is treated just like
other investment assets like cash, shares and so on. But under the income test,
only part of the income you receive from your allocated pension is counted. So
if your age pension is determined by the income test, you get more.
Other advantages of an allocated pension
An allocated pension is flexible – you can vary the income you draw each year
(within defined limits) and make lump sum withdrawals. The amount you can draw
each year must be between a minimum and maximum figure that are re-calculated
each 1st July.
However, unlike a lifetime pension, an allocated pension is not guaranteed.
It is designed to last to your life expectancy but how long it lasts in practice
will depend on investment earnings and how much you draw as an income (and as
lump sums). Nobody knows what their life span will be and there is an increasing
danger that you may outlive your life expectancy (in relation to outliving your
money, that is!). Ideally, drawing an income nearer to the minimum will make
your pension last longer.
When you die, the amount left in your account passes to your estate, or your
spouse can carry on with the allocated pension.
With an allocated pension, you choose the investments. Because an allocated
pension is intended to last a long time, use of growth assets is usually
suggested. The falls in share market values in the last three years have worried
some investors, however, you can choose your own mix of investments using cash,
fixed interest, property and shares. One common strategy is to draw your pension
income from cash and fixed income investments and leave more growth-oriented
investments untouched. This avoids crystallising losses on growth investments
and allows the time to recover.
Just like any other investment, allocated pensions need to be reviewed to
ensure they are meeting your needs.
To find out more and make the best of their flexibility and to maximise
how long they last, talk to Grant Hodgins, Director.
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