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Asset testing of retirement income streams

Section: 9.15

The assets test treatment of retirement income streams is summarised in the table below:

Income stream category Assets test value
Complying income stream purchased prior to 20 September 2004 100% exempt
Lifetime or life expectancy income stream purchased 20 September 2004 to 19 September 2007 50% x [PP - (PP/RN) x TE)]
Defined benefit income stream 100% exempt
TAPS purchased 20 September 2004 to 19 September 2007 50% x account balance
ASSETS TESTED (LONG TERM)
Account based income streams Account balance
Non account based income streams PP - [((PP-RCV/RN) x TE]
ASSETS TESTED (SHORT TERM
Fixed term annuities (term less than 6 years) pp - [((PP-RCV/RN) x TE]

Where:

PP = purchase price less commutations

RN = relevant number

Which is:

  • the term of the income stream where it is payable for a fixed number of years
  • the income support recipient's life expectancy where it is payable during their lifetime only
  • the longer of the income support recipient and the partner's life expectancies where the income stream is jointly owned and payable for life
  • the longer of the income support recipient and a reversionary beneficiary's life expectancies where the income stream is reversionary and payable for life

TE = term elapsed which is the number of years since commencement.

  • For income streams that pay annual payments, the term elapsed is calculated once a year.
  • For income streams that pay more than once per year, the term elapsed is calculated twice a year at the start of each six month period.

RCV = residual capital value

Case studies

The following examples demonstrate the asset test assessment of the various categories of retirement income streams:

Example - term account based pension

John commenced a term account based pension in 2006.

50% of the account balance is an assessable asset.

On 1 July 2016, the account balance is $200,000.

Assessable asset value is 50% x $200,000 = $100,000

Example - 5 year fixed term annuity

Pablo commenced a 5 year term annuity in 2013.

Purchase price $100,000. Nil residual capital value.

It has been 3 years since the annuity commenced.

Assessable asset value is:

PP - [((PP-RCV)/RN) X TE]

$100,000 - [(($100,000 - $0)/5) x 3] = $40,000

Retaining assets test exemption on rollover

100% assets test exempt and 50% assets test exempt income streams that are voluntarily rolled over after 20 September 2007 may retain their assets test exemption if they meet specific exemption criteria.

Where the required exemption criteria is not met, a client's assets test exemption will be lost upon rollover.

Permanent extension of Centrelink debt relief measures for 100% assets test exempt income streams within SMSFs

Under normal social security rules, where a 100% assets test exempt (ATE) defined benefit pension paid by a SMSF fails an annual 'high probability' test, it is then treated as if it had never been an ATE income stream. This can lead to a substantial debt being raised against a client by Centrelink.

To provide relief during the global financial crisis, the Government announced that for 2008-09 and 2009-10, a 100% ATE pension that fails the high probability test will become fully asset tested, but any social security debt as a result of failing this test will be waived.

Further relief was provided for SMSFs from 27 November 2009, which allows any social security debt created to also be waived where:

  • the client's SMSF is paying a 100% ATE pension, and
  • the client provides an actuarial certificate confirming that the income stream does not satisfy the high probability test, and
  • the client rolls over their pension in full (including any reserves) into a term allocated pension within the SMSF. This new term allocated pension will be fully asset tested.

The Government has now made the above debt relief a permanent measure. Similar measures also apply for members of Small APRA Funds (SAFs).

This permanent debt relief does not apply to members of large super funds or SMSF pension members who roll their benefit over to a large super fund to commence a term allocated pension.

Last modified: Tuesday, May 2, 2017