Age-related decline in allocentric (viewer-independent) spatial memory is seen across species. We employed a virtual reality analogue of the Morris Water Maze to study the effect of healthy ageing on neural activity during allocentric spatial memory using functional magnetic resonance imaging. Voxel-based morphometry was used to ascertain hippocampal volumetric integrity. A widespread neural network comprising frontal, parietal, occipital, thalamic, and cerebellar regions was activated in young and older adults, but only young adults significantly activated bilateral hippocampus and left parahippocampus, as well as right frontal pole and dorso-lateral prefrontal cortex (DLPFC) during encoding and right DLPC during retrieval. Hippocampal grey matter volume was unchanged in older adults; however, prefrontal and parahippocampal functional attenuation was accompanied by volumetric reduction. We conclude that the decline in allocentric spatial memory with age is associated with attenuated hippocampal function, as well as compromised function and structure of prefrontal and parahippocampal regions.