Term Allocated Pensions can also be set up within a self managed super fund. A term allocated pension are similar to allocated pensions on many regards, however it has many differences. Term pension income is calculated using the balance of your pension’s savings pool on July 1 each year using a special factor called a pension factor.

The account balance is divided by this factor and the result becomes the income that must be taken over that year, the exact amount has to be withdrawn each year

To start a term allocated pensions, the first step is to establish the term of the pension. The life expectancy of the retiree determines this term. Life expectancy is calculated every few years by Australian Government Actuary and is known as “Australian life tables”.

The term can be based on the average life expectancy table or if you wish to make the pension last longer you can choose a term up to your life expectancy if you were five years younger. For example for a 65 year old male this means that you can choose to calculate your pension using the life expectancy of a 60-year-old male.

If you have a younger spouse, term allocated pension terms can be increased by choosing the pension term according to the average life expectancy of your partner or the partner’s life expectancy if they were up to fiver years younger. You will choose your partners life expectancy if you want to transfer the pension to your spouse on your death.

Thus a 65 year old male retiree with a 60 year old female partner can choose any period of years of his life expectancy and the average life expectancy of a 55 year old woman. Thus the range from the table, the term of pension could be any where between 17 years and 29 years (under the pension rules, the life expectancy is rounded up tho the next whole year).

Although very similar term allocated pensions have a number of rules that make them different to allocated pensions.

1) One Pension factor
The major difference being that term allocated pension have only a single pension factor that decides the pension income that must be paid; where as allocated pensions offer a range of possible pension payments, anywhere between minimum and maximum factors.

2) Lump Sum withdrawals
Lump sum amounts can be withdrawn from an allocated pension, in addition to the nominated income amount, but in term allocated pensions do not offer this facility. Under the term allocated pension rules, extra cash cannot be taken from them.

3) RBL pension limits
Term allocated pension are entitled to extra income tax concessions because they satisfy the higher pension Reasonable benefit Limit, however allocated pension only satisfy the Lump Sum RBL rules, which restrict concessional tax treatment to an amount that is half of the pension RBL.

Special note: If you start an allocated pension from a taxable savings pool that is greater than the lump sum RBL means that some (proportion) of the income from the allocated pension will not be subject o 15% tax rebate and is subject to tax on the retiree’s marginal income tax rate.

To qualify for the higher pension RBL, the retiree must commit at least half of taxable savings pool to term allocated pension.

4) Social security asset test
Term allocated pensions are entitled to concessional treatment under the social security assets test and only 50% of the capital amount is exempt under the assets tests. However, allocated pensions enjoy no such concessions and the full 100% of the capital amount in the super account is counted for assets test purposes.

The chosen average life expectancy will determine the term of the pension and the pension payment factor is used to work out exactly how much income must be withdrawn every year.

For example the table shows that the average life expectancy of a women aged 55 is 29 years (28.53 years), from the table of factors a pension that begins with a 29-year term has a starting factor of 18.04.

Thus the first year’s term allocated pension income will be the pension account balance divided by this factor. If the balance for example is $500,000 the income will be

$500,000 / 18.04 = $27,216

As the term allocated pensions are paid over a whole financial year, where the payment period is less than a full year which may be possible in the first year, a proportional amount is calculated based on the number of days remaining in the year up to 30th June each year. In its first year, if the pension starts on or after June 1 there will be no need to a make a pension payment in that year.

Next year, the new pension factor will be the one for 28 years which is 17.67. If investment returns have increased the account balance during the next 12 months and the new July 1 balance in the following year could be as follows
500,000 less $27,216 (pension) + $22,216 (Income) = $495,000 (closing balance)

495,000 / 17.67 = $28,013 Pension payment

Special note: All income in the pension is exempt from income tax and capital gain tax.

In case of death of the retiree, the remaining capital can be passed on to a retiree’s estate or other beneficiaries.