22 January 2019
Michelle Bromley CFP®
Director, Private Client Adviser
The Government’s 2016-17 Budget included proposed changes to how retirement income products, including lifetime annuities, are to be means tested from 1 July 2019.
The proposed changes are linked to the introduction of Comprehensive Income Products for Retirement and are intended to encourage people to use their retirement savings in a way that supports their needs and helps manage the risk of running out of money as they get older.
This article outlines the proposed changes and discusses possible benefits from using lifetime annuities as part of your retirement income strategy in combination with the Age Pension.
The income and assets tests assess what personal resources retirees have available to support themselves, and then calculate how much Age Pension is offered according to the lower result from the two tests.
For example, a homeowner couple can hold up to a combined $848,000 (homeowner singles $564,000) of assessable assets and/or generate up to $79,736pa (singles $52,120pa) of income and still receive a Part Age Pension.
Some assets and income receive favourable means test treatment. Your Principal Home and Pre-paid Funerals are fully exempt; some retirement income streams might be fully or partially exempt depending on when they were purchased.
For lifetime income streams (e.g. a lifetime annuity) purchased from 20 September 2007 – 30 June 2019, the means tests take into account both the annual income payment and the capital purchase price. Both are reduced by an annual ‘Deductible Amount’. Only the amount of income above the annual deductible amount is counted for the income test, and the assessed capital declines each year by the cumulative annual deductible amount.
Under the current rules, a lifetime annuity can immediately reduce the amount counted under the income test but reduces the capital counted under the assets test slowly over time.
The proposed means test treatment is intended to apply to lifetime income products purchased after 1 July 2019. Generally, the proposed means test rules intend to:
- Assess 60% of payments from a lifetime income stream under the income test; and
- Assess 60% of the lifetime income stream capital as an asset until the recipient’s age 84 (or for a minimum of 5 years) reducing to 30% counted thereafter.
Slightly different treatment will apply to a lifetime income stream that offers a death benefit or surrender value. Annuities purchased prior to 1 July 2019 will retain the current means test treatment.
Possible Opportunities and Benefits
Determination Under the Assets Test
The proposed treatment may be beneficial where a Part Age Pension would be determined under the assets test, as up to 40% of the annuity purchase price would be immediately exempt. Part Age Pensioners in this category could immediately achieve an increased Age Pension payment if they use part of their retirement savings to purchase a lifetime income stream after 1 July 2019.
However, if the income test assessment prevails in later years once the retiree’s capital has declined, future Age Pension entitlements might be lower. Although there is likely to be a trade-off between higher income in earlier years and lower income in later years (a bird in the hand so to speak), industry analysis suggests the overall outcomes are broadly similar under the current and proposed tests.
Benefits Determined Under the Income Test
The proposed rules generally result in more of the annuity income being assessed under the income test compared to the current ‘deductible amount’ method, probably resulting in lower Age Pension payment than under the current treatment.
However, an opportunity currently exists for retirees with a Part Age Pension determined under the Income Test if they purchase a lifetime annuity before the new rules are implemented.
The expected start date for the new treatment is 1 July 2019; however, the Social Services and Other Legislation Amendment (Supporting Retirement Incomes) Bill 2018 is still before Parliament and has not yet attained Royal Assent.
What to do?
Talk to your adviser well in advance of 1 July 2019 about whether a lifetime annuity might help you increase or attain Age Pension entitlement.
“The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL No. 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the relevant Product Disclosure Statement (PDS) of any financial product discussed in this article before making any decision to acquire it. Please refer to our FSG (available at https://www.primefinancial.com.au/wp-content/uploads/2018/08/PS-Financial-Services-Guide-V16-15-August-2018.pdf) for contact information and information about remuneration and associations with product issuers.
Also, while the article need not contain the link to the statement that industry analysis shows that the outcomes under the current and proposed assets tests are broadly similar, we suggest you retain the supporting material on file. This helps protect you against a suggestion that the article is misleading, deceptive or contains unsubstantiated statements.