A term allocated pension (TAP) is a type of Superannuation income stream that pays a market-based income over a specified term. TAPs are sometimes referred to as market-linked pensions (MLPs), and the two terms are used interchangeably for the same product structure.

TAPs were introduced in 2004 as part of a class of complying super income streams designed to provide structured retirement income while retaining market exposure. They were also designed to be eligible for certain Centrelink concessions, including a 50 per cent asset test exemption that applied to qualifying products commenced before specific cut-off dates.

New TAPs were generally closed to investors from 20 September 2007, although existing TAPs continue to operate, and transitional rules allow some restructuring within particular legal frameworks.

How TAPs work

A TAP is established by transferring a member's super into a term allocated pension product with a chosen term. The term must fit within prescribed limits that relate to the member's life expectancy and other factors, with the maximum often extending beyond life expectancy to a specified maximum age.

Each year, the annual payment range is calculated by dividing the Account Balance at the start of the year by a payment Factor that decreases as the term progresses. Members generally choose an amount within this range, with the fund making payments at the agreed frequency.

Investment returns affect the balance and therefore the future payment levels. When the term ends, the balance is depleted, regardless of investment performance. TAPs traditionally have limited commutation rights, although transitional rules can permit restructuring to other complying products under specific conditions.

Who uses TAPs?

Term allocated pensions are commonly held by:

  • Retirees who commenced TAPs before they were closed in 2007
  • Members who relied on the Centrelink asset test concession that historically applied to TAPs
  • SMSF members with legacy TAP arrangements
  • Retirees who appreciated the structured, term-based income design

TAPs are not generally available as new products, and current retirees typically use account-based pensions, annuities or innovative income stream products instead.

Main features

  • Term-based super income stream
  • Annual payment calculated using a prescribed formula linking balance and remaining term
  • Term must satisfy specific rules around minimum and maximum length
  • Limited commutation rights, with transitional exceptions
  • Historically classified as a complying income stream with potential Centrelink concessions
  • Closed to new investors from 20 September 2007
  • Subject to transfer balance cap rules for retirement phase

Legacy Pension benefits

TAPs were originally designed to deliver structured, market-linked retirement income with specific concessional treatment under the Centrelink rules in force at the time.

Grandfathered Centrelink treatment is a key consideration today. Existing TAPs that have continuously met the requirements may retain a 50 per cent asset test exemption, which can be significant for Age Pension eligibility. Restructuring such a TAP may cause this treatment to be lost.

Structured income over a defined term suits some retirees who prefer a planned framework rather than discretionary drawdown decisions.

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

TAP risks  

TAPs are complex and may not suit every member.

  • Limited commutation rights compared with account-based pensions
  • Income can vary significantly year to year as the balance changes
  • Restructuring can risk losing grandfathered Centrelink treatment
  • Term-based design may not align with actual life span
  • Complex valuation rules under the transfer balance cap regime
  • Past performance is not a reliable indicator of future returns

Rules

TAPs 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 a TAP is determined under specific formulas, with TBAR reporting required for changes.

Earnings within the fund supporting a retirement-phase TAP 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 TAP commenced. Grandfathered TAPs may have specific asset test treatment, while non-grandfathered TAPs are generally subject to the current means testing rules.

Managing Retirement Income

For retirees who already hold a TAP, the focus is typically on managing the existing arrangement rather than commencing a new product. Decisions involve whether to maintain the TAP, restructure under available transitional rules, or coordinate with other income streams.

Some members benefit from restructuring TAPs into more flexible income streams where transitional rules allow, but others are better off retaining the grandfathered features. A careful analysis of the trade-offs is essential, and professional advice is typically required.

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

Mistakes to avoid

  • Restructuring a TAP without understanding the impact on grandfathered Centrelink treatment
  • Ignoring TBAR reporting obligations for SMSFs
  • Setting a term that is inappropriate for income needs
  • Failing to integrate the TAP with broader retirement income planning
  • Overlooking changes in legislation affecting legacy products
  • Not engaging specialist advice for legacy income streams

Things to Review First

  • Does my TAP have grandfathered Centrelink treatment?
  • How would restructuring or commuting affect that treatment?
  • How is my TAP valued for transfer balance cap purposes?
  • How does the TAP integrate with my other retirement income sources?
  • What happens to the TAP on death?
  • Have I sought specialist advice on legacy income streams?