Unlocking flexibility: Term allocated pensions

What Retirees Need to Know About Commuting a TAP

If you’re a retiree with a Term Allocated Pension (TAP), you may have heard about recent changes that could give you more control over your retirement income. From December 2024, new rules allow you to fully commute (or exit) your TAP within a five-year window – a rare opportunity to restructure your finances and potentially improve your retirement outcomes.

Here’s what you need to know…

What is a Term Allocated Pension (TAP) and How Do I Know if I Have One?

A Term Allocated Pension (TAP) is a type of retirement income stream that was popular before 2007. It’s sometimes called a “complying pension” because it met certain government rules at the time.

Here’s what makes a TAP different:

• It runs for a fixed term (for example, 15 or 20 years), based on your life expectancy when you started it.
• You receive regular payments each year, and the amount is calculated so the account runs out at the end of the term.
• You couldn’t normally withdraw lump sums or change the payment amount outside the set rules.

How do you know if you have one?

• Check your superannuation statements. If your pension is described as a Term Allocated Pension, Complying Pension, or Market-Linked Pension, you likely have one.
• TAPs were mostly started before 20 September 2007, so if your pension began after that date, it’s probably not a TAP.
• If you’re unsure, ask your super fund or adviser, they can confirm for you.

What’s Changed?

Previously, TAPs were locked in and couldn’t be exited early. But under the legacy pension amnesty, you now have until December 2029 to fully commute your TAP. This means you can:

• Move your funds into a more flexible pension (like an Account-Based Pension)
• Keep the money in your super’s accumulation account
• Withdraw some or all of it as a lump sum

Partial withdrawals aren’t allowed – it’s all or nothing.

Why Consider Commuting Your TAP?

Here are some reasons retirees might choose to commute:

• Avoid large pension payments near the end of the TAP term, which could affect your Age Pension
• Switch to a more flexible pension that better suits your needs
• Wind up a self-managed super fund (SMSF) if it’s no longer practical
• Access capital for medical costs, home repairs, or other needs
• Reduce potential tax on death benefits for non-dependent beneficiaries

Effect on Social Security Payments (Age Pension)

If you currently receive the Age Pension, commuting your TAP can change how Centrelink assesses your benefits.

• Loss of 50% Assets Test Exemption: TAPs usually enjoy a 50% exemption under the assets test. Once you commute your TAP, this exemption disappears, and the full balance will count towards your assets. This could reduce your Age Pension.
• Debt Waiver for Overpayments: If losing the exemption means you were overpaid in the past five years, normally Centrelink would raise a debt. However, the Government announced that these debts will be waived once the measure starts. If you commute after this date, you won’t have a debt raised.
• Timing Matters: If you haven’t received a social security benefit in the last five years, you can commute at any time without worrying about claw-back.

Real-Life Example: Tim

Tim is 83 and wants to maximise his Age Pension. If he commutes his TAP and starts a new pension, his Age Pension could drop by over $4,000 per year due to the assets test. But if his assets were lower, commuting might not affect his pension at all and could give him more flexibility.

Tax Considerations

Tax outcomes depend on whether your TAP qualifies as a Capped Defined Benefit Income Stream (CDBIS):

• If it does, commuting may trigger a complex calculation that affects how much of the proceeds can stay in the tax-free pension phase.
• If it doesn’t, the process is simpler — you can usually move the full amount into a new pension without tax complications.

Also, if you take the money out of super, you may pay more tax on investment earnings – but you could avoid death benefits tax if the money is passed to non-dependent beneficiaries.

Is It Right for You?

Commuting a TAP can offer greater flexibility, but it’s not always the best move. It depends on your:

• Age Pension eligibility
• Tax position
• Health and estate planning goals
• Transfer Balance Cap (TBC) space

Need Help Deciding?

This is a once-in-a-generation opportunity, but it’s complex. If you’re unsure whether commuting your TAP is right for you, we’re here to help. Our advisers can walk you through the pros and cons based on your personal situation.

General Advice Disclaimer: The information in this article is general in nature and does not take into account your personal objectives, financial situation, or needs. Before making any decisions about commuting a Term Allocated Pension or changing your retirement income strategy, you should consider whether the information is appropriate for you and seek advice from a qualified financial adviser. Rules and legislation can change, and the impacts on tax and social security entitlements will vary based on individual circumstances.