The retirement income market is set for significant change, with the introduction next week of new means test rules for pooled lifetime income products. Commentators say there is plenty of discussion in the industry about the opportunities the new rules open up.
The new means test rules, included in Social Services and Other Legislation Amendment (Supporting Retirement Incomes) Act, apply to all pooled lifetime income products held by social security or Department of Veterans Affairs income support recipients purchased after commencement date (1 July).
Pooled lifetime income streams are products “that pool funds of multiple people to provide consistent income to surviving members for life.” They also include products that defer making payments for a period of time.
Under the income test, the means test will assess 60 per cent of payments from a pooled lifetime income stream as income. For example, where a lifetime income stream pays income of $5000 a year, $3000 will be assessed under the income test.
This reflects that part of the payments made are a return of the annuitants capital and therefore not income.
For deferred lifetime income streams, the assessment will apply once income payments commence and not assessed during the deferral period.
Term annuities are not covered by the changes.
Under the assets test, the means test will generally assess a proportion of the total purchase amount for the pooled lifetime income stream. Sixty per cent of the purchase amount will be assessed at the point of purchase. This will continue until the person reaches their “threshold day”, after which 30 per cent of the purchase amount will be assessed.
Threshold day is calculated with reference to the life expectancy of a 65-year old male on the assessment day, according to the Australian Government Actuary Life Tables (currently age 84). The threshold day is no less than five years after assessment day.
The industry has welcomed the new means test regime. Under the old rules the full purchase price of an annuity was means tested. The impact of this was that sales of lifetime annuities collapsed.
Rice Warner chief executive Andrew Boal says: “There is a bias against annuities because the annuitant has to give up capital. There needs to be some financial incentive to get people to buy them. What we have got now is OK.”
Boal, who is also convenor of the Actuaries Institute’s retirement strategy group, says likely product development includes deferred annuities, where the income stream starts later in life; variable annuities, which combine some sharing of investment risk with longevity protection; and self-annuitisation, where longevity protection is provided by the retirees in the pool, rather than a life company.
Boal says: “We have not seen anything in the market yet but there are plenty of discussions going on between life companies and superannuation funds.”
The means test changes are part of a broader push to develop the retirement income part of the superannuation system. Super funds will have to develop a retirement income strategy for members, and by 2022 they must offer their members comprehensive income products in retirement (CIPRs).
Superannuation legislation will include a Retirement Income Covenant, which will codify the requirements and obligations for superannuation trustees to consider the retirement income needs of their members.
Australians enjoy one of the highest life expectancy rates in the world but retirees are currently offered little guidance or choice when they put their super into a retirement income stream.
Boal says: “Since the early 1970s, the life expectancy of the average 65-year old has increased from around 12 years to 20 years for men and 22 years for women. But longevity is not uniform, it varies considerably from person to person, so some form of longevity protection will be helpful for many Australians.”
