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Income testing of retirement income streams

Section: 9.11

Generally, the gross annual payment less a social security deductible amount is assessed for the income test.

The following table sets out the income test assessment of the various categories of retirement income streams:

Category Income test
Asset test exempt
 
Annual payment  -  (purchase price / relevant number)          
Asset tested (long-term)
*Not including deemed account based pensions
Annual payment   -  ( (Purchase price - Com - RCV)  / relevant number)
Asset tested (short-term) Deemed
Annual payment = annual payment is the amount payable to the person for the financial year under the income stream
Com = commuted amounts
RCV = residual capital value
 

Relevant number = 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

An exception applies to account based income streams from 1 January 2015. Account based income streams are deemed unless they qualify for grandfathering. For information on the income test assessment of defined benefit income streams.

Note: Details of each formula above are discussed in the following sections. If a reversionary beneficiary's life expectancy is longer then it is used to calculate the deductible amount.

Case studies

These examples demonstrate the income test assessment of the various categories of retirement income streams:

Example - lifetime pension (asset test exempt)

Joan commenced a lifetime pension in 2005 which is asset test exempt. The purchase price at commencement was $200,000 and her life expectancy was 22 years. Joan receives an annual payment of $10,000.

Assessable income is: $10,000 - ($200,000/22) = $909

Example - life expectancy pension (asset test exempt)

Peter commenced a life expectancy pension in 2006. The purchase price at commencement was $200,000 and the term was 15 years.

Peter receives an annual payment of $15,000.

Assessable income is: $15,000 - ($200,000/15) = $1,667

Example - reversionary account based pension (asset tested long term)

Mark commenced an account based pension in 2012 that is reversionary to his wife Helen. Mark's life expectancy at commencement is 18.54 and Helen's life expectancy is 23.35.

The purchase price at commencement was $200,000. The account based pension is grandfathered and therefore not subject to deeming. Mark receives an annual payment of $15,000.

Assessable income is: $15,000 - ($200,000/23.35) = $6,435

Example - fixed term annuity (asset tested short term)

Gina commenced a term annuity. The purchase price at commencement was $200,000 and the term was 5 years. As her life expectancy at commencement exceeds 5 years, it is not classified as an asset tested (long-term) income stream but rather an asset tested (short term) income stream which is deemed.

Assessable income is: ($49,200 x 1.75%) + ($150,800 x 3.25%) = $5,7621

1. Assume Gina has no other financial investments subject to deeming

Last modified: Tuesday, May 2, 2017