Focus: Superannuation May 2004
Income stream reforms
In brief: The Federal Treasurer is expected to release draft regulations shortly on two major retirement income stream reforms that were announced in February this year. One reform will encourage the introduction of new income stream products and create new opportunities for superannuation providers. The other will change current asset test exemptions and make existing products for complying income streams less attractive. Senior Associate Lois Dannecker looks at the proposed reforms.
The Federal Government intends to bring in the market-linked income stream products (MLIS products) reforms by the end of September this year. The new MLIS products will differ from existing complying income streams (such as lifetime and life expectancy products) in that the amount of annual income generated by the MLIS products will vary each year, depending on the value of the investments supporting the pension.
Purchasers of MLIS products will be required to draw down their capital over their life expectancy and will not be able to withdraw their capital before the term of the product has ended (ie MLIS products will generally be non-commutable). As a result, these new MLIS products will be eligible for the higher reasonable benefit limit (RBL) and the 50 per cent asset test exemption (see below).
The following key features for the MLIS product were outlined by the Federal Government on 30 March 2004:
- the term of the product must be the beneficiary's life expectancy at the time of purchase (according to the Australian Life Tables), rounded up to the nearest whole number;
- payments from the MLIS product must be made at least annually, with annual payment amounts determined in accordance with a schedule of payment valuation factors that will be designated in the Superannuation Industry (Supervision) Regulations;
- providers must pay a pro rata payment in the first year, where a MLIS product commences on a day other than 1 July, but;
- a payment need not be made in the first year of the income stream where it commences on or after 1 June;
- strict commutation conditions for a MLIS product will be based on those that apply to existing complying life expectancy products;
- if the income stream reverts or is commuted, it cannot have a reversionary component or a commutation amount greater than 100 per cent of the member's account balance immediately prior to the reversion or commutation;
- the annuity or pension cannot be transferred to another person except in specified circumstances;
- the capital value of a MLIS product, or the income from it, cannot be used as security for borrowing;
- retirees will be able to purchase MLIS products before reaching the age pension age, but the 50 per cent asset test exemption (see below) will apply only from age or service pension age; and
- retirement savings account providers will also be able to offer MLIS products.
Rules for these new MLIS products will be contained in the Superannuation Industry (Supervision) Regulations 1994, the Retirement Savings Account Regulations 1997 and will be referenced in the Income Tax Regulations 1936.
The Government requested initial industry feedback on its proposed new MLIS product design features by 14 April this year. It has announced that the products will be available by 20 September this year, so it is expected that the Government will release draft regulations soon.
Currently complying income stream products (such as lifetime and life expectancy products) are 100 per cent exempt from the asset test applied to determine access to social security benefits. The second reform will, from 20 September 2004, reduce this to a 50 per cent exemption only. The reduced exemption will also apply to the new MLIS products.
The opportunity therefore remains to purchase a complying income stream product before 20 September 2004, to access the 100 per cent exemption.
Although the new MLIS products will be less flexible than allocated pensions, their attraction may be that, unlike allocated pensions, they will be subject to the higher pension RBL and the 50 per cent asset test exemption. However, the halving of the asset test exemption may influence future investment decisions of retirees seeking some social security support more than the introduction of the new MLIS products will.
We will continue to monitor the reform process. In the meantime, please contact us if you wish to discuss the proposed reforms.
- John MorganPartner,
Ph: +61 2 9230 4953
- Mark CerchéPartner,
Ph: +61 3 9613 8872
- Erin FerosPartner, Sector Leader - Mining,
Ph: +61 7 3334 3313