The introduction of growth pensions in September 2004 gave Australian retirees more investment flexibility than ever before by enabling them to tap into higher growth investments, such as shares and property.
Because growth pensions are deemed as complying pension products, they can assist retirees to qualify for a higher limit on the amount of tax-favoured super benefits they can receive (known as the "pension reasonable benefit limit" or "pension RBL") as well as for a partial exemption under the age pension assets test.
Growth pensions have a similar account arrangement to a standard allocated pension, where payments are made on a regular basis, however, investors will receive payments for a fixed period based on their life expectancy.
In fact, life expectancy is the key to working out the term of a growth pension. The term of a growth pension is based on the investor’s life expectancy at the commencement or on the life expectancy of someone the same gender but up to five years younger. The ability to choose a term based on the life expectancy of a younger person provides some additional flexibility to choose a longer term.
If they choose a reversionary beneficiary for the pension, such as their spouse, it is possible to set the term of the growth pension using the life expectancy of the reversionary pensioner if it is longer than the purchasing pensioner’s.
The pre 1 January 2006 rules typically give a term that would run to about age 80 to 85 for men, and to 85 to 90 for women. For a male retiring at 65 who sets their growth pension out to the average life expectancy of 83, the income payments made out of their pension will be divided by 18 years.
However, from 1 January 2006, amendments to the existing legislation (commencing 1 January 2006) has increased the term of the pension from commencement date up to the age of 100, meaning retirees can take out their pension income over a much longer period, thereby reducing annual payments so their money can last longer.
To find out if you can take advantage of this change, please contact us today.
