Characteristics of Recognised Income Stream Products

In the 1997-98 Budget Statement, Savings: Choice and Incentive, the Government announced changes to the social security means test treatment of retirement income stream products. Under the new rules, products which have specified characteristics will from I July 1998; be exempt from the age pension assets test. Under the income test, the actual income from these products will be assessed with a deduction allowed for return of capital based on purchase price.

A more rational income test for longer term products will be provided, and an assets test exemption will also be provided for products with the following characteristics:

• Existing 'complying' lifetime income streams under the Superannuation (Industry) Supervision (SIS) Regulations will qualify for the new social security treatment and will therefore become recognised income stream products. It will no longer be mandatory for such products to include annual CPI indexation or a 5 percent annual increase.

Other income stream products must:

• have a guaranteed term of life expectancy of at least 15 years where life expectancy exceeds 15 years and commence at or after Age or Service Pension age. Life expectancy is to be determined in accordance with the Australian Life Tables as at the commencement date of the income stream - products offering a term of greater than life expectancy will not be recognised for this purpose;
• provide that benefit payments be made at least annually and the size of the payment be fixed with any variation, allowing for indexation, specified in the contract or the fund's governing rules and consistent with the SIS Regulations;
• not be commutable to a lump sum except on terms consistent with those currently set out for existing complying pensions and annuities in the SIS Regulations;
• have no residual capital value during the expected life of the primary beneficiary or at term; and
• have a reversionary benefit not exceeding the existing capital value at the time of the commutation (ie the draw down of capital over the term of the product must be evident)

Consistent with the new social security rules, the Government also announced that it would amend the SIS Regulations (and if necessary Income Tax Regulations) so that income stream products which have the above characteristics will also be classified as a complying income stream products for the purposes of qualifyng for the higher superannuation pension Reasonable Benefit Limit (RBL).

The characteristics required for these income stream products are outlined in the Attachment to this press release.

In the case of unfunded defined benefit superannuation pensions, such as the public sector schemes, the assets test exemption will continue.

Full details of the required characteristics of recognised income stream products will be set out in the social security and veterans' affairs legislation, and SIS regulations.

Recognised income stream products will be able to receive money from non-eligible termination payment (ETP) sources.

An exposure draft of the amendments to the social security legislation is expected to be available shortly. Industry comments on the draft will be sought to identify practical workability issues associated with recognised income stream products. Draft amendments to the SIS regulations will also be prepared in the light of these industry comments.

A number of related issues still need to be considered but will not be included in the draft legislation We believe that more time needs to be spent assessing the following issues:

• the possibility of recognised income stream products operating as fixed term account based products. Allowing recognised income stream products to operate on an account basis under which the member rather than the product provider bears the investment risk may have a number of positive retirement income policy effects and could promote competition by expanding the range of potential product providers, but these benefits have to be weighed against potential tax deferral and estate planing concerns;
• resolving the uncertainty surrounding the tax, social security and regulatory treatment of commutations of allocated products; and
• resolving the uncertainties surrounding the tax, social security and regulatory treatment of 'hybrid' products.

A separate discussion paper on these issues will also be released in the near future.

26 August 1997

Contact:
John Hewitt (Sen. Newman's Office) - (06) 277 7560 - (0417) 216 342
Richard King (Sen. Kemp's Office) - (06) 277 7360 - (0419) 683 586

1. Paid at least annually
   1. for life; or
   2. if purchased at or over age or service pension age
      1. for a term of life expectancy (the term may be rounded up to the next full year); or
      2. for a term between 15 years and life expectancy (the term may be rounded up to the next full year) if life expectancy is greater than 15 years. Any fixed length of term between 15 years and life expectancy may be nominated.

The term must commence on the purchase day of the product. The purchasers life expectancy must be used, not the life expectancy of a reversionary beneficiary. For a product with a reversionary beneficiary, each member of the couple will be individually assessed against these characteristics for their share of the income stream.)

2. The size of payment in each year is fixed in the contract, with any variation allowing for indexation specified in the contract. This means the payment must be the same amount each year, except for variation allowing for indexation, so that the market risk is borne by the provider. The variation for indexation, if included, must be consent with current SIS regulations.
3. No residual capital value.
4. Non-commutable (except in limited circumstances, see 9a and 9b).
5. Any reversionary or commutation component must not exceed the existing capital value at the time of the commutation (ie. the drawdown of capital over time must be evident).
6. Cannot be transferred to another person (except reversionary beneficiary).
7. Cannot be used as security for borrowing .