Pensions - Manage your Own Superannuation Fund - Establish & Annual Administration DIY Super Funds

An allocated pension is a pension paid to a member from his super account following retirement or cessation of employment. From the capital invested (purchase price) in the allocated pension account you can receive a regular, tax-effective, social security effective, flexible pension payments. In simple terms, an allocated pension is an income stream from a lump sum investment offered by a superannuation fund.

Allocated pension payments may continue until all balance the money’s are withdrawn or you take the remaining benefits as a lump sum amount. To work out how much and till when you will be paid will depend upon the earnings added to the account and how much you withdraw from the account as pension payments and lump sums.

To start a pension, you generally must be at least age 65 (and can still be working) or aged 55 and retired. Each year, you can select the amount of pension that you receive as long as it falls within the minimum & maximum limits specified.

Investment earnings (income and capital gain) within the fund are not taxed. The tax rate is ZERO. When you receive a pension from the Superannuation fund, you may pay tax on your pension payments; these pensions may contain a tax-free component and may also qualify for a tax rebate that could mean the payments are partly or fully tax-free.

Lump sum withdrawals from the Superannuation fund are also favourably taxed as ETPs. All allocated pensions are non-complying pensions for RBL purposes, and are therefore treated as lump sum benefits for such purposes.

Allocated pensions can also be accessed through DIY Super funds. Another type of allocated product is called an annuity and can be accessed only through life offices.

Allocated pension payments have a minimum withdrawal, which have to be made from a fund to the member, they must be paid at least once a year or can be paid quarterly, monthly etc.

An allocated pension can only be purchased using funds from an ETP or superannuation balance. ‘Golden handshakes’ received from an employer can also be used to purchase an allocated pension but the amount will has to be first deposited in the Superannuation fund and contribution tax at a rate of 15% on entry into the super fund has to be paid.

When you receive a pension, the taxable portion of the pension payments may be taxed at your marginal tax rates and you may be eligible for a 15% pension rebate.

The biggest advantage of an allocated pension is that income of the fund (paying an allocated pension) is tax-free. Put simply, a member has their own superannuation account against which pension payments are debited and to which any investment earnings (tax free) are credited.

You can access more funds than your maximum allowable pension during the year if you wish but any amount withdrawn over the maximum amount is a withdrawal and not a pension payment and so does not enjoy the same tax treatment as a pension payment.

Your DIY super fund can pay you a pension from one account and accept contributions in another account (could be in the same DIY Super Fund), however the funds have to be segregated as income of the account paying a pension is not subject to income tax

The amount of pension, that is, minimum or maximum depends on the fund balance as on 1st July each year and has nothing to do with the earnings of the fund during the year. All calculations are based on the balance of the fund at the beginning of the year (or pension commencement date if part way through the year).

If the allocated pension is being paid from an amount in excess of your lump sum reasonable benefit limit then your superannuation fund account becomes tax exempt but the pension you receive from the excess amount is fully taxable as normal wages earnings. In addition, tax is levied on the excess component, over Pension RBL level, on death of 47%. Where a pension is commenced with both excessive and non-excessive components the taxable component of the pension is the percentage of the excessive component.

The capital balance of the allocated pension account is counted as an asset under the assets test rules for Centrelink & Vetrans affairs payments, however, do not subject allocated pension assets to deeming under the Income Test.

For Centrelink and Vetrans affairs before paying any pensions will first look at the amount of pension received after the deduction of the exempt component at the time the pension commences and apply this to the Income Test. If Income is lower than the prescribed limit, only than will make Pension payments.

You can access part or all of the balance of your allocated pension account at any time as an Eligible Termination Payment (lump sum). Allocated pension benefits that are commuted to a lump sum payment and may be taxed at the concessional lump sum tax rates but any such draw downs alter your tax free and incomes test exempt amounts as they must be recalculated.

Upon death, any balance remaining in the account can be paid to a designated beneficiary as a (taxable) lump sum payment (non-revisionary pension), or is applied to secure a further pension payment to a surviving spouse (revisionary pension). If you elect to choose a revisionary pension, you can choose to use your spouse’s minimum and maximum Pension limits. On the subsequent death of your spouse, the remaining account balance will be paid to the estate or surviving dependants if applicable.

On death the balance of the account will be paid either as a lump sum or a pension. Lump sum payments may be paid by the Trustee to your estate, or to a beneficiary, being a spouse, dependant child, de facto spouse or person financially dependent on you. Where no beneficiary is identifiable, payment will be made to your estate.

Lump sum death benefits are paid by the Trustee in accordance with the governing trust deed and legislation. The Trustee may decide on the form of the lump sum payment which may be by way of a transfer of assets, or cash resulting from the sale of assets.

In DIY super fund your surviving spouse or family members will be the Trustees of the superannuation fund.

Sometimes it is believed that money can run out, however, it all depends on the withdrawal amount (min or max) and the income of the fund. If you have a low balance and low income and high withdrawal, the money may run out quickly. The following examples explains the situation

Please note each year minimum and maximum pension factors will change each year.

The income tax return of the taxpayer will show the following (2004 rates) would include the income as follows:

Less Mature Age Tax offset. It is envisaged that income up to $31,500 will attract NIL income tax payable after the 15% rebate.

Some of the Allocated pension payment may not be taxable. This amount represents a return of capital (return of your own money) and is known as the deductible amount.

The following components make up the deductible amount in the Super Fund purchase price of the Allocated Pension

A = the member’s share of the pension (usually 100%)
B = the un-deducted purchase price and other tax-exempt components of the ETP rolled over into the allocated pension;
C = the residual value of the pension (this will be nil for an allocated pension); D = the life expectancy factors.

If there is $200,000 in the super fund & $80,000 represents undeducted purchase price. Deductible amount for each year will be calculated as follows (Life expectancy factor assumed to be 19.09):

In simple terms, from the total pension payments (minimum or maximum ) for each year $4,190 is the deductible amount and the balance is taxable amount subject to 15% rebate.

Under a revisionary allocated pension you can use the life expectancy of the reversionary beneficiary or whichever is the greater or longer to give you a desired result.

Year	Balance	Income	Pension	Closing Balance
1	450,000	31,500	25,000	465,500
2	456,500	31,955	25,000	463,455
3	463,455	32,442	25,000	470,897
4	470,897	32,963	25,000	478,860
5	478,860	33,520	25,000	487,380
6	487,380	34,117	25,000	496,496
7	496,496	34,755	25,000	506,251

Year	Balance	Income	Pension	Closing Balance
1	450,000	31,500	50,000	431,500
2	431,500	30,205	50,000	411,705
3	411,705	28,819	50,000	390,524
4	390,524	27,337	50,000	367,861
5	367,861	25,750	50,000	343,611
6	343,611	24,053	50,000	317,664
7	317,664	22,236	50,000	289,901

Pension Amount	25,000	50,000
Tax on Income	4,047	11,922
Less 15% Rebate	3,750	7,500
Balance Tax to pay	297	4,422