Highlights

  • Market-linked pensions (MLPs), also known as term allocated pensions (TAPs), are legacy super income streams that pay income over a fixed term using a market-based formula.
  • They were generally closed to new members from 20 September 2007, but many existing arrangements continue under grandfathered rules.
  • Payments are calculated annually based on Account Balance and remaining term, and outcomes depend on Centrelink, tax, and transfer balance cap rules.

A market-linked pension (MLP), also known as a term allocated pension (TAP), is a legacy Superannuation income stream that pays retirement income over a fixed term. Instead of providing a lifetime pension or a lump sum, it distributes super benefits over a defined period using a formula linked to the account balance and remaining term.

Market-linked pensions were introduced in 2004 and were generally closed to new investors from 20 September 2007. However, many existing members still hold these pensions, often under grandfathered Centrelink or tax treatment depending on when they commenced.

Payments from an MLP are calculated each year using a prescribed formula that links the remaining account balance with the remaining term of the pension. This results in variable annual income that changes over time depending on Investment performance and drawdown calculations.

What is a market-linked pension in Australia?
A market-linked pension is a superannuation income stream that pays retirement income over a fixed term. It is also commonly referred to as a term allocated pension. The pension continues until the end of the selected term, at which point the balance is fully exhausted. These products are now closed to new members but remain in place for existing account holders.

How a market-linked pension works
A market-linked pension is established by transferring superannuation savings into a pension account with a fixed term. Each year, the minimum and maximum payment amounts are calculated using a formula based on the account balance and remaining term.

The income is paid throughout the year within allowable ranges set by the rules. As the term reduces, the payment factors change, gradually increasing the drawdown proportion. At the end of the term, the account balance is fully depleted.

Who commonly uses market-linked pensions?
Market-linked pensions are typically held by retirees who commenced them before they were closed to new investors in 2007. They are also found in SMSF arrangements and among individuals who retained grandfathered Centrelink treatment.

These pensions are not commonly used by new retirees today, who generally use account-based pensions or other modern retirement income streams.

Key features of market-linked pensions
Market-linked pensions provide income over a fixed term using a structured formula. They offer minimum and maximum annual payment limits, limited commutation flexibility, and term-based drawdowns.

They were historically classified as complying income streams, often providing Centrelink advantages. However, they are now legacy products with restricted availability and limited modification Options.

Benefits of market-linked pensions
One of the main benefits of market-linked pensions is potential grandfathered Centrelink treatment, which may improve Age Pension eligibility for some retirees. They also provide structured income over a defined term, offering predictability in Retirement Planning.

Tax treatment in retirement phase can also be favourable, particularly where members are aged 60 or over, with tax-free payments and exempt fund Earnings under superannuation rules.

Risks and limitations
Market-linked pensions have several limitations. They offer limited flexibility compared with account-based pensions, and income can vary depending on investment performance and formula-based drawdowns.

Restructuring or commuting these pensions may result in the loss of grandfathered Centrelink benefits. In addition, the fixed-term structure may not align with actual life expectancy or changing financial needs.

Taxation and regulatory framework
Market-linked pensions are governed by superannuation law and the transfer balance cap regime. Their valuation for transfer balance cap purposes follows specific rules, and reporting obligations may apply, particularly for SMSFs.

Earnings in retirement phase are generally tax-exempt within the fund, and payments are typically tax-free for members aged 60 or over, subject to standard superannuation tax rules.

Centrelink treatment depends on the commencement date, with older pensions potentially retaining grandfathered asset test benefits.

Role in retirement planning
Market-linked pensions are primarily relevant for existing retirees rather than new strategies. They often form part of a broader retirement income structure alongside Age Pension entitlements, account-based pensions, and other investments.

Decisions typically focus on whether to retain, restructure (if allowed), or integrate the pension with other income sources while managing Centrelink and tax impacts.

Common mistakes to avoid
Common mistakes include restructuring without understanding the loss of grandfathered benefits, ignoring transfer balance cap implications, and failing to align the pension with overall retirement income needs.

Other issues include poor timing decisions, lack of professional advice, and misunderstanding legacy product rules.

Conclusion
Market-linked pensions are legacy superannuation income streams that provide structured income over a fixed term. While no longer available to new investors, they remain important for existing members, often with valuable Centrelink and tax implications. Due to their complexity, professional advice is essential before making any changes.