DIY Funds Mourn Death of the Defined Benefit It has been a slow and tortuous process but defined benefit pensions paid from DIY super funds have finally been killed off by the federal government.
The official date of death will be December 31, 2005, because people who were members of a small self-managed super fund before May 11 2004 can still begin a defined benefit pension up until the end of the year.
For people in that situation there is likely to be a rush to get financial advice on whether it is worthwhile bringing forward their retirement date to take advantage of the old rules. That is the sort of once-off opportunity that financial planners love. The reason the government announced its initial crackdown on defined benefit pension from DIY funds back in May 2004 was because of perceived abuses of the rules that allowed people with many millions of dollars in super to establish a defined benefit pension in a way that avoided breaching the reasonable benefit limits set for all individuals and their super. There was criticism of the government's move because effectively the ban on defined benefit pensions being paid out of a small fund forces DIY super funds to buy their pension or annuity from major institutions rather than running them out of their own fund. The government has responded to that criticism by making changes to what are known as market-linked income streams or term allocated pensions to make them more flexible and attractive. Term allocated pensions have been a fizzer in terms of new product growth but these rule changes may alter that. Pensions beginning from January 1 next year will be able to be set either to your life expectancy or up to age 100. You will also be able to vary your annual income withdrawal by plus or minus 10 per cent. That will make term allocated pensions a much more flexible and attractive option when people are planning their income needs in retirement. A major criticism of the original structure of term allocated pensions was that once you set the term of the pension the annual income payments were fixed and could not be changed and of course the fundamental issue with anything set for your life expectancy is that it is just that - an expectation. So people were naturally worried about outliving their money. While some people will bemoan the changes to defined benefit pensions at least the situation is now clear and people can get on with planning for their retirement with greater certainty. And the compromise that has been reached that gives greater flexibility for term allocated pensions will ensure that DIY super funds will continue to be attractive to people in the pension phase. For financial planners with specialist knowledge in DIY super funds the changes are likely to be a real boon for business. It will now be even more critical to get good advice about the best combination of pension product - be it allocated pension, term allocated pension or complying annuity
 
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