DATE OF ISSUE: 24 June 1993
ALLOCATED PENSIONS AND "WITH PROFIT" ANNUITIES
PROPOSED LEGISLATIVE CHANGES DEFERRED
INTERIM INCOME/ASSET TEST RULES TO BE APPLIED
The purpose of this instruction is to;
i)advise that the proposed legislative changes to the income/asset test treatment of Allocated Pensions and "With Profit" Annuities have been deferred, and
ii)outline the income/asset test assessment procedures that should be applied in the interim.
WHAT IS AN ALLOCATED PENSION ?
1.An Allocated Pension (also known as a "Cash‑Back", "Draw‑Down" or "Personal" Pension), is like a superannuation pension in that the investor can contribute to a superannuation fund while they are gainfully employed, and then elect to draw a pension.
2.However, unlike a normal superannuation pension which has fixed payments (with or without indexation), an Allocated Pension or "cashback" pension can be drawn upon by the purchaser at the rate and amount desired (subject to minimum and maximum limits), until the balance of the purchaser's account is exhausted.
3.Allocated Pensions give the purchaser more control over the rate at which the pension is utilised, but at the risk of the individual running out of savings. So, whereas with normal superannuation pension the provider guarantees payments for life, with an Allocated Pension there is no such guarantee.
CURRENT INCOME/ASSET TEST TREATMENT OF ALLOCATED PENSIONS
4.Allocated Pensions are currently assessed under the superannuation pension rules. That is, once pension payments commence they are assessed as income after allowing a deduction for the return of the undeducted purchase price. They are totally exempt from the asset test.
PROPOSED CHANGE TO THE ASSESSMENT OF ALLOCATED PENSIONS
5.Under the proposed legislative changes, Allocated Pensions would be assessed under the managed investment rules. That is, the balance in the purchaser's account would be multiped by the rate of return on the investment to produce an assessable rate of income. Actual amounts drawn-down by the purchaser would be ignored. The balance in the purchaser's allocated pension account would be assessed as an asset.
6.The reason for this proposed change is that Allocated Pensions are more similar in structure to managed investments than superannuation pensions. Therefore, the treatment of Allocated Pensions is merely being brought into line with that given to most other investments.
DEFERRAL OF PROPOSED CHANGES
7.The proposed changes were to have taken effect from the end of 1992. However, amendments to the Social Security Legislation Amendment Act No.3 1992 were passed by the Senate to defer the implementation of these changes until 1 October 1993; or the date of report to the Senate by a Senate standing or select committee on the application of the proposed legislation, whichever is the later. Amendments to the Veterans' Entitlements Act in respect of Allocated Pensions are expected to be put forward during the Budget session of Parliament.
8.No action will be taken to apply the proposed changes until the matter is resolved. In the interim, the income/asset test assessment procedures detailed in this Instruction should be applied.
INCOME AND ASSET TEST ASSESSMENT PROCEDURES
9.As the funds offering Allocated Pensions are recognised as complying superannuation funds, the Department of Veterans' Affairs and the Department of Social Security have been applying the following interim income and asset test assessment policy.
WHERE A PENSION HAS COMMENCED TO BE DRAWN‑DOWN
10.As soon as a pensioner elects to draw an Allocated Pension from their fund it is considered to be a superannuation pension.
11.The assessable income will be the "GROSS" income per fortnight, less the "DEDUCTIBLE AMOUNT" per fortnight allowed for tax purposes.
12.No asset value is assessed; and no profit is assessed on lump sum withdrawals if the Allocated Pension has commenced.
13.The provider of the allocated pension should be requested to complete a "SCHEDULE OF INFORMATION ON SUPERANNUATION PENSION FOR DVA & DSS PURPOSES" so that details of the gross pension and deductible amount can be obtained.
14.The correct data collection procedure is to record the superannuation pension on the PIPS Income Screen PP.IN, under the superannuation category. A miscellaneous super code should be entered, along with the "GROSS" and "DEDUCTIBLE AMOUNT" figures. Depending on whether or not the individual has chosen a fixed or indexed pension, the relevant super codes are:
MISC 98 FIXED ‑ Miscellaneous superannuation funds that pay a
fixed pension.
MISC 99 INDEX ‑ Miscellaneous superannuation funds that pay an
indexed pension.
(NOTE: DI B09/90 refers for a comprehensive list of all super codes).
WHERE A PENSION HAS NOT COMMENCED TO BE DRAWN‑DOWN
15.If a pensioner has not yet elected to receive an Allocated Pension from their fund, the fund is considered to be a managed investment, and is assessable under the managed investment rules.
16.These funds are listed on the PIPS Investment Information Screen PP.II, so that they can be data collected onto the Managed Investment Screen PP.MI.
17.Care should be taken in selecting the correct product. If any product displays a message in the "WHEN ASSESSED" field which says "SEE IPO FOR ASSESSMENT DETAILS", please contact your local Investment Policy Officer for more detailed processing instructions.
18.Where the pensioner has not yet attained pensionable age (i.e., 60yrs male veteran; 55 yrs female veteran; 65 yrs male partner; 60 yrs female partner) the total amount held in their Allocated Pension fund is considered to be an "Exempt Superannuation Fund Investment" and no income or asset value is held until the pensioner reaches pensionable age (unless of course the client makes a withdrawal).
19.When pensionable age is attained, the asset and income value of the Allocated Pension investment will become fully assessable. These cases are triggered to become assessable when the routine fortnightly and global managed investment reassessment programs detect the appropriate client age change.
20.Clients holding unitised Allocated Pension investments will be reassessed automatically and an advice letter issued to the client informing them of the action taken and the new status of their investment(s).
21.A non-unitised Allocated Pension investment will not be able to be automatically reassessed and will be noted on a manual reassessment case list for the managed investment reassessment run. Following manual reassessment a manual advice letter must be issued to the client.
22.The recording and processing of Allocated Pension investments is identical to the treatment of superannuation investments which have not commenced to be drawn-down. Useful instruction on the processing of Allocated Pension Investments can therefore be found in the Departmental Instruction on Exempt Superannuation Investment Funds, DI number B20/93 (dated 2.4.93).
23.It is important to note that once a client commences to draw-down on an Allocated Pension investment, it is considered to be a superannuation investment and should therefore be treated as described at paragraphs 10 to 14 of this Instruction.
HOW ARE "WITH PROFIT" ANNUITIES AFFECTED ?
24.Unlike normal annuities, the amount to be paid to the purchaser under a "With Profit" Annuity is not fully set out in the annuity contract. The contract will specify a minimum rate, but additional payments or bonuses depend upon the profitability of the investments used to pay the annuity.
25.The Treasurer's Superannuation Statement of 30 June 1992 set down common standards for annuities and pensions. This will mean that products like Allocated Pensions can now be sold as annuities as well, and that the dividing line between Allocated Pensions and "With Profit" Annuities will blur to some extent.
26.Like Allocated Pensions, "With Profit" Annuities allow people some control over when returns are received. For that reason, it has been proposed to treat them in the same way.
27.However, the current annuity rules will continue to apply to annuities where the payment rate and basis of any variation (i.e., indexation) is fully defined in the annuity contact.
28.The current annuity rules should also be applied to "With Profit" Annuities until the issue of the deferred proposed legislative changes is resolved.
PENSIONERS INTENDING TO PURCHASE ALLOCATED PENSIONS
29.Due to the interim nature of the income and asset assessment procedures currently in place, there is no guarantee when the proposed changes to the treatment of Allocated Pensions will come into effect. It is advisable to make this point known to persons who approach this Department for information on how Allocated Pensions will be assessed for pension purposes.
30.Allocated Pensions have all along been developed and sold by the investment industry in a climate of uncertainty about the eventual assessment rules to be applied. In this regard, both the Department of Veterans' Affairs and Social Security have always stated that the treatment of these investments would be reviewed, and that existing investors would not necessarily be quarantined from the effects of any changes.
BRANCH OFFICE ENQUIRIES
31.The information in this instruction should be used as a basis to answer telephone and/or written enquiries on this issue.
32.Branch Office staff are most likely to encounter cases with allocated pensions when processing new claims for service pension. However, a pensioner can join an Allocated Pension fund if they are gainfully employed in paid work for at least 10 hours a week.
33.To assist staff in identifying these investments, a list of current Allocated Pension funds is at Attachment A.
34.If you have any enquires in relation the assessment of Allocated Pensions please contact your local Investment Policy Officer. The Central Office contact in respect of this matter is Martin Dibb - contact 06-2896706.
MURRAY HARRISON
A/G NATIONAL PROGRAM DIRECTOR
BENEFITS
ATTACHMENT A
LIST OF CURRENT ALLOCATED PENSION FUNDS
ADVANCE LIFE
Retirement Plan
AM MANAGEMENT LIFE TRACK
Life Track Rollover Pension Plan ‑ Cash Back
BAIN MANAGEMENT
Master Personal Super Fund ‑ Draw Down Pension
CBA FINANCIAL SERVICES
Personal Super Allocated Pension
CONNELLY TEMPLE
Advisor Personal Pension Plan
EXCELSIOR SUPERANNUATION
Managed Super Division 3
FREEDOM OF CHOICE FUND MANAGEMENT
Personal Pension Plan Division 3
LE FORT FUND MANAGERS
Personal Pension Plan Division 3
LUMLEY LIFE
Allocated Pension Plan
MACQUARIE INVESTMENT
Personal Pension Plan
METWAY CORPORATION
Allocated Pension
NORTHERN SECURITIES MANAGEMENT
Super Benefit Plan ‑ Personal Pensions Plan
NORWICH AUSTRALIA ASSET MANAGEMENT
Navigator Plan ‑ Personal Plan
RETIREMENT INVESTMENT SOLUTIONS
Spectrum Personal Pension Plan
SMF FUNDS MANAGEMENT
Personal Pension Plan Division 3
TOP QUARTILE MANAGEMENT
Allocated Pension
TPF&C SUPERANNUATION
Master Superannuation - Personal Pension Plan