Account Based Pensions came into existence as a result of the ‘simpler super’ reforms.
So, what’s the difference between an Allocated Pension and an Account Based Pension?
Allocated Pension vs Account Based Pensions
Allocated Pensions were income stream products that could be commenced with all or some of accumulated superannuation savings; generally within an industry super fund, retail super fund or self managed superannuation fund (SMSF).
The income that could be drawn from an Allocated Pension was based on minimum and maximum life expectancy income factors. Each financial year, the pension recipient would be required to take an income between these minimum and maximum thresholds.
There is no guarantee that an Allocated Pension will provide an income stream for the life of the recipient. The longevity of an Allocated Pension is determined by the level of income withdrawn and the earnings within the account. Once the account balance reduces to $0, the recipient will receive no further pension payments.
The introduction of Account Based Pensions in 2007 effectively replaced the Allocated Pension. The ‘simpler super’ reforms also removed the upper income payment threshold, requiring members to only meet the minimum pension income requirements. The maximum income that can be drawn each year only being limited by the account balance.
Further, the minimum pension income factor of the Allocated Pension (calculated using life expectancy factors) was replaced in the new Account Based Pensions with a simple percentage factor, based on the age of the recipient, as shown below:
|Age||Minimum Pension Income Factor p.a.|
|Preservation Age – 64||4%|
|65 – 74||5%|
|75 – 79||6%|
|80 – 84||7%|
|85 – 89||9%|
|90 – 94%||11%|
This minimum pension factor is applied to the balance of the Account Based Pension on 1 July of each year (or pro-rata based on part years). This minimum income must be withdrawn from the pension recipient (member) at any stage throughout the financial year by way of one or more pension payments.
Difference between Allocated Pensions and Account Based 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.
Therefore, if an Allocated Pension was commenced prior to the existence of an Account Based Pension, it basically converted to an Account Based Pension on 1 July 2007.
Funnily enough, 10 years later, the term ‘Allocated Pension’ remains just as prevalent as the term ‘Account Based Pension’. Many superannuation and income stream providers still refer to Account Based Pensions as Allocated Pensions.
Ultimately, the terms Allocated Pension and Account Based Pension can be (and are) used interchangeably.
Account Based Pension vs Transition to Retirement Pension
The difference between an Account Based Pension and a Transition to Retirement (TTR) Pension is one small factor – a Transition to Retirement Pension has an upper income payment factor of 10% p.a. This means that the recipient is limited to taking up to 10% of the account balance in pension payments each year; unlike Account Based Pensions, which do not have an upper limit. The 10% is calculated on 1 July of each financial year (or pro-rata if the income stream was commenced part way through a financial year).
The reason why a person would commence a Transition to Retirement Pension instead of an Account Based Pension is because an Account Based Pension is only available to a person who has met a full superannuation condition of release, providing them with unrestricted access to their superannuation savings.
A Transition to Retirement Pension on the other hand is a non-commutable pension and can be commenced by a person still working, provided they have reached their superannuation preservation age. It provides limited access to their superannuation savings (between 4% and 10% of the account balance each year) while they are ‘transitioning’ to retirement.
Superannuation Preservation Ages are as follows:
|Date of Birth||Preservation Age|
|Before 1 July 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|
|On or after 1 July 1964||60|
The balance of a TTR Pension will not count towards the new Transfer Balance Cap ($1.6 million – indexed) imposed from 1 July 2017. Additionally, all earnings received from a TTR Pension will be taxed at up to 15% from 1 July 2017 (compared to tax-free pre 1 July 2017); whereas all earnings received from assets supporting an Account Based Pension will be received completely tax free.
Allocated Pensions and Centrelink
Allocated Pensions and Account Based Pensions are assessed identically for Centrelink and Aged Care purposes. Under the assets test, Account Based Pensions and Allocated Pensions are fully assessable. That is, the full value of the pension on any given day is counted towards the Centrelink ‘assets test’ or Aged Care ‘means tested care fee’.
The assessable income of an Allocated Pension or Account Based Pension depends on when the pension income stream commenced. If it was started prior to 1 January 2015 AND the member was in receipt of a social security payment on that date; then the assessable income is based on the deductible amount method. You will need to request your Centrelink Schedule from your superannuation income stream provider to determine this.
If the income stream began after 1 January 2015 OR the member was not in receipt of a social security support payment on 1 January 2015; then the pension will be deemed for Centrelink ‘income test’ and Aged Care’ means tested care fee purposes.
This should provide you with an overview of Allocated Pensions vs Account Based Pensions. Feel free to browse the categories for other superannuation articles and information that may help.