Termed allocated pensions (TAPs) were introduced in 2004 and have enjoyed popularity with clients looking for a more flexible approach to creating a pension.
But rule changes by the Government on July 1 and again on September 20 have made TAP products a minefield for the unwary adviser.
ING technical manager George Avramides said the Centrelink assets test will be relaxed on these products after September 20.
“The products will still be around after this date, they will just be called allocated pensions,’ he said.
However, from July 1 the transition to retirement pensions will allow no more than 10 per cent of the account balance to be withdrawn in any one year.
“We will be putting all existing clients into pensions that meet the minimum requirements,” he said.
“People do not have to commute their existing pension to meet the new rules.”
Avramides said people over 60 will need to consider the minimum deductible amount before considering an allocated pension product.
“But they also have to consider the Centrelink balance changes when looking at these products.”
However, Centrelink will only count 50 per cent of the balance between July 1 and September 20.
“The client buying one of these products between those dates could be at a disadvantage, so the adviser will need to look very carefully as to when the allocated pension is started,” Avramides said.
“There will also be some areas of estate planning that need to be looked at carefully, as in death there could be tax issues for the spouse.”
Macquarie Adviser Services head of technical services David Shirlow agrees the vast majority of TAP clients will convert their investment into the new account-based pension products.
“The fund provider will adopt the new minimum pension requirements,” he said.
“If the client is 60 or more, then new tax hurdles will apply.”
Shirlow doesn’t believe people will set up allocated pensions after September 20 because of the revised tax treatment.
“Prior to September 20, I think a significant number of people will set up what will be TAPs to take advantage of locking in the concessional tax,” he said.
“By locking in the 50 per cent exemption on complying income streams, the client will get this for the life of the product.”
Shirlow said after that date there are still opportunities for these products to be used for clients that want guaranteed returns with low risk.
“It will be a question of whether the client is concerned about the asset test exemption requirements, which will mean these products will have a limited appeal,” he said.
“If people are looking for an age pension and extra guaranteed income after retirement, these products will still have a role.”
Shirlow said one option is to put a client into an allocated pension product to provide a base income while receiving additional payments from other investments.
“It is a questionable practice if the allocated pension becomes part of a balanced portfolio structure that is there to provide a base income,” he said.
“If using a balanced fund, then will the client get a reasonable return as the age pension is not a safety net?”
Shirlow said a preferred strategy was to use the allocated pension as a base income mixed with a set of appropriate investments to provide further income.
“By guaranteeing an income, if the client wants a higher income level, then this is ensuring they get a premium for the risk they will be taking,” he said.
MLC technical services manager Andrew Lawless said while some people wanted a guaranteed amount of income each month, they also wanted the flexibility of a better potential income in the longer term.
However, September 20 has created a significant defining moment for TAPs.
“The real question is what TAPs can’t offer new investors after this date, but we can still offer a product to an existing complying pension,” he said.
“We have to look at how we will keep the product open to attract new investors.”
Lawless said the products will move into a different product area, but how they perform in the marketplace will be closely watched.
“The allocated pension still will have a role in income steams and they will still be useful for clients looking to work under the social security rules,” he said.
“Allocated pensions might also have a role for an investor that wants a fixed rate for part of their portfolio over a five-year period.”
Lawless said the key was to lock into the TAP before September 20.
