16 June 2004

New Complying Market Linked Pension

The Minister for Revenue and Assistant Treasurer, Senator Helen Coonan, today released the proposed design features of the new market linked income stream which will be available from 20 September this year.

The new market linked income stream will provide a less complicated and more flexible option for retirees wanting a complying income stream product and forms part of A More Flexible and Adaptable Retirement Income System which was announced in February.

“The market linked income stream fills a key missing niche in the income streams market,” Senator Coonan said.

“It combines the investment flexibility of an allocated pension with the tax and social security benefits of a complying pension and can be provided by all superannuation funds, including Do-It-Yourself funds.”

Market linked income streams will offer legitimate tax concessions such as access to the higher pension Reasonable Benefit Limit (RBL), as well as a 50 per cent social security assets test exemption. The new product will allow people in DIY funds to retain control of their capital and for payments to be made to dependants in the event of premature death.

“The design features of the new market linked income stream have been developed in close consultation with industry and incorporate a number of their suggestions,” Senator Coonan said.

“The new product will increase competition in the income streams market and give retirees more choice in how they finance their retirement.

“It has been developed to provide for a term which is more flexible, to offer the potential for higher investment returns over time, and to be cheaper to administer.”

The market linked income stream provides retirees with some flexibility over the term. It will allow a person to choose a term based on their (or their spouse’s) life expectancy or their life expectancy as if they (or their spouse) were up to five years younger.

“This is an important development in income stream design which will cater to retirees seeking a greater degree of income security in the event that they live longer than the average life expectancy for their age group,” Senator Coonan said.

The details of the new product will be contained in regulations which the Government expects to introduce into the Parliament later this month.

A summary of the main features of the new complying market linked pension is attached and the technical detail of the new market linked income stream is available on the Minister’s website.

Media Contact:
Jane McMillan
0438 690 305


Attachment A

FEATURES OF MARKET LINKED INCOME STREAMS

General

A market linked income stream fills a key missing niche in the pension market.

It combines the investment flexibility of an allocated pension with the tax and social security benefits of a complying pension.

All superannuation funds, including DIY funds, will be able to provide this income stream.

Concessions

As a complying pension, market linked pensions are eligible for the higher pension reasonable benefit limit of $1,176,106 and for a 50 per cent asset test exemption.

Flexible Term

The market linked pension provides a complying pension with flexibility over the term:

  • A person will be able to choose a term between their life expectancy and their life expectancy if they were five years younger.
  • The term can also be based on the spouse’s life expectancy (or the spouse’s life expectancy if they were 5 years younger). This can substantially extend the term of the pension.

    Example: Bob is aged 65 and his wife Jane is aged 60. Bob retires and purchases a market linked pension. His term options are:

  • A male aged 65 can choose a term between 17and 21 years (the life expectancy of a 65 and 60 yo male respectively).
  • Alternatively, using his wife’s life expectancy, Bob can choose a term between 25 and 29years.

Investment Choice

Market linked pensions offer the same investment choice as an allocated pension. There are no specific restrictions on investments, aside from limits on superannuation funds more broadly. For the first time, market linked pensions provide a complying pension with investment choice. For example, it allows DIY funds to manage their own assets.

People who are risk averse can invest in fixed interest assets to provide a stable income stream that resembles a life expectancy pension. Alternatively, people who want the opportunity for higher returns can invest in equities and other growth oriented investments.

Simplicity

The market linked pension is a simple, account based pension product that can be offered by any superannuation fund, including a DIY fund.

For the first time, it offers a complying pension that does not require the involvement of an actuary. This will reduce the cost to retirees and increase retirement income.

Drawdown

The payment factors set out in regulations will extinguish the capital over the term of the product.

The factors are also designed so that the person will receive higher levels of income over time (subject to investment returns).

Commutation

The pension can be commuted as follows: within the first 6 months, upon death, to purchase another complying pension, to pay a surcharge liability, and to effect a payment split under family law.

Treatment of capital upon death

A market linked pension is commutable on death with the remaining assets paid to a spouse, dependant or estate.

This is the same treatment that applies to life expectancy pensions.

However, if the term of the pension was based on the life expectancy of a spouse, the pension cannot be commuted on death until the death the surviving spouse.