Turning off the TAPs

According to IOOF technical manager Sam Rubin, for most clients, TAPs were primarily used as a vehicle to access the higher pension reasonable benefits limit (RBL) and to reduce assessable assets for social security purposes while providing investment flexibility and income payments.

“Now that RBLs are to be abolished from July 1, 2007, and with the assets test 50 per cent exemption for complying income streams also to be abolished from September 20, 2007, it is reasonable to expect that TAPs will become increasingly redundant over the long-term,” he says.

“However, in the interim, there is still potential for clients to invest in TAPs, particularly for clients whose primary focus is to maximise the social security age pension.”

ING technical manager Scott Quinn agrees.

“Any TAPs purchased prior to this date [September 20, 2007] will maintain partial — 50 per cent — asset test exempt status,” he says.

“Given this, we are likely to experience an increase in the amount of TAPs purchased prior to September 20, 2007, with the intention to maximise current or future social security entitlements.”

From September 2004 TAPs have enabled investors to increase their eligibility to an age or part age pension because of their complying income stream status, which is currently 50 per cent exempt from the assets test.

As announced in the Budget, from September 20, 2007, the pension assets test taper rate will be reduced from $3 to $1.50 per fortnight for every $1,000 of assets above the free area.

Also from this date, complying income streams (such as TAPs) will be abolished and therefore not have access to the assets test exemption.

But Rubin adds: “People will still be eligible for a 50 per cent exemption for complying income streams purchased before September 20, 2007, and 100 per cent if purchased prior to September 20, 2004.

“So there will still be a window of opportunity for those retiring in the near term to take out a complying pension product such as a TAP with its 50 per cent exemption before September 20, 2007.”

So while the long-term future of TAPs is terminal, there is still a window of opportunity for clients in the short-term.

Quinn adds: “On or after September 20, 2007, there will be no RBL or social security benefits gained by purchasing a TAP. Superannuation monies will be directed into the new simplified pension products as announced in the 2006 Federal Budget.”