A more flexible and adaptable retirement income system moved a step closer today with the release of the proposed detail of the new market-linked income stream products that will be available to Australians from 20 September this year.
The Minister for Revenue and Assistant Treasurer, Senator Helen Coonan, and the Minister for Family and Community Services, Senator Kay Patterson, today called for input from industry and other stakeholders into how market-linked income streams would best work.
These products were announced by the Treasurer on 25 February 2004 in the paper A more flexible and adaptable retirement income system and will be eligible for the higher reasonable benefit limit and a 50 per cent assets test exemption.
“The Treasurer’s announcement in February and the Government’s broader approach to providing Australians with more choice and flexibility about how best to invest their money is about helping Australians to retire when they’re ready,” Senator Coonan said.
“Complying market-linked income streams are an important development for the retirement income system. They will provide retirees with more choice about how they finance their retirement and increase competition in the complying income stream market.”
The release of the general characteristics of these income streams will allow product providers to progress development of their products before the relevant legislation has been passed. It will also assist prospective retirees in planning for their retirement.
Senator Patterson said the development of market-linked income stream products reaffirmed the Howard Government's continued commitment to senior Australians, giving them greater choice and improved access to higher incomes in their retirement.
“This product offers senior Australians an opportunity to maximise their returns to their lifetime savings, providing them with security in their retirement years,” Senator Patterson said.
A list of the proposed characteristics of the new income stream is attached.
Comments on the proposed characteristics are invited from interested parties up until 14 April 2004 and can be made to superannuation@treasury.gov.au.
ATTACHMENT
PROPOSED CHARACTERISTICS OF THE NEW MARKET-LINKED INCOME STREAM
It is proposed that the new market linked income streams (MLIS) will have the following key design features:
- The term of the product will be the beneficiary’s life expectancy
at the time of purchase (according to the Australian Life Tables) rounded
up to the nearest whole number.
- Consideration is being given to allowing the option of a longer term within a specified range.
- Consideration is also being given to allowing the option of basing the term of an income stream which reverts on death to a surviving spouse, on the longer of the two spouses’ life expectancies.
- Payments from the product must be made at least annually, with annual payment
amounts determined in accordance with a schedule of payment valuation factors
(PVFs) which will be contained in the Superannuation Industry (Supervision)
Regulations (SISR).
- The schedule of PVFs will be set out according to the remaining term
of the product. The payment amount in a given year will be calculated
by dividing the product’s account balance on 1 July of that year
by the PVF for the relevant remaining term. Annual payment amounts are
to be rounded to the nearest $10.
- For example, for a pension with a term of 17 years (approximating male life expectancy at age 65) and an initial account balance of $200,000, the required payment in year 1 would be:
($200,000/12.65) = $15,810
- For a pension with a term of 23 years (approximating female life expectancy at age 62) and the same initial account balance, the required payment in year 1 would be:
($200,000/15.62) = $12,800
- The schedule of PVFs will be set out according to the remaining term
of the product. The payment amount in a given year will be calculated
by dividing the product’s account balance on 1 July of that year
by the PVF for the relevant remaining term. Annual payment amounts are
to be rounded to the nearest $10.
- In the case where a MLIS commences on a day other than 1 July, providers will be required to pay a pro rata payment in the first year (a similar rule is contained in SISR Schedule 1A in respect of allocated income streams). There will be no obligation to make a payment in the first year of the income stream where it commences on or after 1 June (a similar rule applies to allocated income streams).
- The commutation conditions for a MLIS will be based on those which apply
to existing complying life expectancy products. These conditions are set out
in SISR 1.05(9) and 1.06(7).
- For example, a payment of the remaining account balance will be allowed on the death of the primary beneficiary to a reversionary beneficiary or to the primary beneficiary’s estate. However, if the option is taken to base the term of an MLIS on the longer of two spouses’ life expectancies, commutation would only be allowed on the death of the reversionary beneficiary.
- If the income stream reverts or is commuted, it will be prevented from having a reversionary component or a commutation amount greater than 100% of the member’s account balance immediately prior to the reversion or commutation (a similar rule is contained in the existing pension and annuity standards in SISR).
- The annuity or pension will be prevented from being transferred to another
person except in the circumstances set out in SISR 1.05(9) and 1.06(7).
- For example, on the death of the primary beneficiary, the income stream could be transferred to a reversionary beneficiary or to the estate of the primary beneficiary.
- The capital value of a MLIS or the income from it will be unable to be used as security for borrowing, as is the case for the current assets test exempt life expectancy product.
- Retirees will be able to purchase MLIS products from below age pension age. However, the 50 per cent assets test exemption will only apply from age or service pension age. This is consistent with the approach taken for the existing life expectancy product.
- Retirement savings account providers will also be able to offer market linked income stream products.
The rules for the new market-linked product will be contained in the Superannuation Industry (Supervision) Regulations 1994, the Retirement Savings Account Regulations 1997 and referenced in the Income Tax Regulations 1936. Similar rules will be contained in the Social Security Act 1991.