A market-linked pension (MLP), also commonly known as a term allocated pension (TAP), is a type of super income stream that pays a market-linked income to a member over a specified term. Market-linked pensions were introduced in 2004 as a complying income stream with certain Centrelink and tax concessions and were generally closed to new investors from 20 September 2007.

Although MLPs are no longer offered as new products, many existing members continue to hold them, often with grandfathered Centrelink treatment. Some members are also able to commute and convert existing MLPs into other complying products under specific transitional rules, particularly within SMSFs.

MLPs are paid from a member's super balance, with payments calculated each year using a prescribed formula linking the remaining Account Balance to the remaining term of the pension.

How a market-linked pension works

An MLP is established by transferring a member's super into a market-linked pension product with a chosen term. The term must satisfy specific rules, typically ranging from a minimum reflecting the member's life expectancy (with some flexibility) up to a longer term, such as the period to a chosen maximum age.

Each year, the minimum and maximum annual payment is calculated by dividing the account balance at the start of the year by a payment Factor that decreases as the term progresses. The fund pays the chosen amount across the year, typically with some flexibility around the level chosen within the prescribed range.

When the term ends, the balance is exhausted, regardless of Investment performance. Members do not generally have access to lump sum commutations beyond the limited circumstances allowed under the legacy rules and transitional pathways.

Who commonly uses market-linked pensions?

Market-linked pensions are commonly held by:

  • Retirees who commenced MLPs before they were closed in 2007
  • Members who relied on the Centrelink asset test concession that applied to MLPs at the time
  • SMSF members with legacy term allocated pensions
  • Retirees who valued the structured, term-based nature of MLP income

MLPs are not generally available as new products, and most retirees today use account-based pensions, annuities or innovative income stream products instead.

Key features

  • Super income stream paid over a specified term
  • Annual payment calculated using a prescribed formula linking balance and remaining term
  • Minimum and maximum payment range each year
  • Limited commutation rights, with specific exceptions
  • Historically classified as a complying income stream with certain Centrelink concessions
  • Closed to new investors from 20 September 2007
  • Transitional rules can allow restructuring in some cases

Potential benefits

MLPs were originally introduced to combine market exposure with structured retirement income, and some legacy features can still be valuable today.

Grandfathered Centrelink treatment is a major consideration. MLPs commenced before relevant cut-off dates were eligible for a 50 per cent asset test exemption (or similar treatment depending on the timing). For some members, this treatment may continue, and it can have a meaningful effect on Age Pension eligibility.

Structured income over a defined term can also be helpful for retirees who prefer a predictable framework, even though the actual amount can vary year to year based on the balance.

Tax treatment within the retirement phase generally mirrors other retirement-phase pensions, with tax-free Earnings up to the transfer balance cap and tax-free payments to members aged 60 or over.

Key risks and limitations

Market-linked pensions are complex and may not suit every member.

  • Limited commutation rights compared with account-based pensions
  • Income can vary significantly each year as the balance changes
  • Restructuring an MLP can risk losing grandfathered Centrelink treatment
  • Term-based design means the pension may exhaust before or after the member's actual life span
  • Complex valuation rules under the transfer balance cap regime
  • Past performance is not a reliable indicator of future returns

Tax, Superannuation or regulatory considerations

MLPs are subject to specific rules under the Superannuation Industry (Supervision) Act, related tax law and the transfer balance cap regime. The transfer balance value of an MLP is calculated using specific formulas, and TBAR reporting applies.

Earnings within the fund supporting a retirement-phase MLP are generally exempt from earnings tax up to the transfer balance cap, and payments to members aged 60 or over are typically tax-free.

Centrelink treatment depends on when the MLP commenced. Grandfathered MLPs may have specific asset test treatment, while non-grandfathered or modified products are generally treated under the current means testing rules.

How it fits into Retirement Planning

For retirees who already hold an MLP, the strategy focus is typically on managing the existing arrangement. Decisions include whether to maintain the pension, restructure (where permitted) into another complying product, or coordinate with other income streams and the Age Pension.

Restructuring can be appropriate in some cases — for example, where transitional rules allow members to move into more flexible income streams without losing key features. In other cases, restructuring may reduce grandfathered benefits, so the trade-offs need to be carefully analysed.

MLPs are usually one part of a broader retirement income picture that includes the Age Pension, other super and non-super investments, and personal circumstances such as health, expenses and family considerations.

Common mistakes to avoid

  • Restructuring an MLP without understanding the impact on grandfathered Centrelink treatment
  • Ignoring TBAR reporting requirements for SMSFs
  • Setting the term too long or too short relative to actual income needs
  • Failing to integrate the MLP with broader retirement income planning
  • Overlooking the impact of changes to legislation on legacy products
  • Not seeking professional advice before commuting or modifying the pension

Questions to ask before using this instrument

  • Does my MLP have grandfathered Centrelink treatment, and how would restructuring affect it?
  • How does the MLP fit with my other income streams and Age Pension entitlements?
  • What rules apply to commuting or modifying the pension under the current law?
  • How is my MLP valued for transfer balance cap purposes?
  • What happens to the pension on death?
  • Have I obtained advice from a specialist familiar with legacy income streams?

Summary

A market-linked pension is a legacy super income stream that pays market-based income over a specified term, calculated using a prescribed formula. Although closed to new investors in 2007, many MLPs remain in place, often with grandfathered Centrelink treatment. They are complex and offer limited flexibility compared with newer products. Members holding MLPs should obtain specialist advice before making changes, particularly where restructuring may affect long-standing Centrelink or tax benefits.