Key Design Characters of the new market linked income stream

The key proposed design features of the new market linked income stream are set out below.

Term of the product

• Individuals who purchase a market linked income stream will be able to choose the term of the income stream from within a specified range. The term will be a period of whole years no less than the primary beneficiary’s life expectancy on the commencement day of the income stream (rounded up to the next whole number) and no greater than the primary beneficiary’s life expectancy on the commencement day calculated as if they were 5years younger (rounded up to the next whole number). For example, a male aged 65 will be able to choose a term of a whole number of years no less than their life expectancy at age 65 and no greater than their life expectancy at age 60.
• In the case of a market linked income stream that reverts to a spouse on the death of the primary beneficiary, there will be an option to base the term on the longer of the two spouses' life expectancies. For example, a 65 year old male with a 60year old spouse will have the option of basing the term of the income stream on the younger spouse’s life expectancy. Under this option, the term will be a period of whole years no less than the spouse’s life expectancy on the commencement day of the income stream (rounded up to the next whole number) and no greater than the spouse’s life expectancy on the commencement day calculated as if they were 5years younger (rounded up to the next whole number).
• Life expectancy for purposes of the term of the new product will be ascertained with reference to the Australian Life Tables published by the Australian Government Actuary. Income stream providers will have the choice of using either the most recently published Australian Life Tables or the 1995-97 Australian Life Tables for income streams which commence between 20September 2004 and 31December 2004. For income streams commencing on or after 1 January 2005, life expectancy will be ascertained with reference to the most recently published tables.

Payment rules

• Payments from a market linked income stream will need to be made at least annually, with annual payment amounts determined in accordance with a schedule of payment factors (see Table).
• The annual payment amount from a market linked income stream will be calculated by dividing the account balance of the income stream on 1 July of the relevant year (or the commencement day in the case of the first year of the income stream where that is a day other than 1 July) by the payment factor that corresponds to the remaining term of the income stream expressed in whole years. The payment amount calculated under this process will be rounded to the nearest 10 dollars.
• A rounding rule will apply for determining the number of whole years remaining on the term of a market linked income stream. The remaining term on each 1 July will be rounded to a whole number of years according to whether the income stream commenced before 1 January, or on or after 1 January in a financial year.
  • For products commencing before 1 January, the remaining term on each 1July will be rounded down to the nearest whole number of years. Where the remaining term rounds to zero, a payment factor of 1 will be used to calculate the final payment from the income stream.
  • For products commencing on or after 1 January, the remaining term on each 1July will be rounded up to the nearest whole number of years.
• Where a market linked income stream commences on a day other than 1 July, providers will be required to pay a pro ratapayment in the first year. 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.

Commutation and transfer conditions

• A market linked income stream will only be commutable in specified circumstances.
• Commutation will be permitted on the death of the primary or reversionary beneficiary where a lump sum is paid to either person’s legal personal representative, to one or more of their dependants or, where reasonable enquiries have failed to identify either a legal personal representative or a dependant, to another individual. This commutation condition will also allow payment of a new pension or annuity on the death of the primary or reversionary beneficiary to a dependant of either person.
• The ability to commute a market linked income stream on death will be restricted in cases where the term of the income stream is based on the longer of two spouses’ life expectancies. In such cases, commutation on death will be permitted only after the death of both spouses.
• Commutation will also be permitted: within six months of the market linked income stream commencing (provided that it was not funded from the commutation of another complying income stream); to purchase another complying income stream; to pay a superannuation contributions surcharge; or to give effect to a payment split under family law.
• A market linked income stream will not be allowed to have a residual capital value. However, this rule will not interfere with the ability to commute a market linked income stream on the death of the primary beneficiary or a reversionary beneficiary.
• A market linked income stream will not be transferable to another person except on the death of the primary beneficiary or a reversionary beneficiary to one of the dependants of the deceased person or to the deceased person’s legal personal representative.

Payment Factors for Market Linked Income Streams