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Lifetime income streams

Section: 9.4

For social security means test purposes, a new category of retirement income stream applies from 1 July 2019 - lifetime income streams.

Lifetime income streams was added to cater for a new range of 'innovative retirement income stream products' that are expected to become available due to changes in superannuation and tax laws. Innovative retirement income streams include deferred annuities and group self-annuitised products that are designed to cater for longevity risk.

Lifetime income streams also include immediate lifetime annuities.

What are lifetime income streams?

To qualify as a lifetime income stream, the income stream must be purchased on or after 1 July 2019, and once payments commence, they must continue for the remainder of the primary or reversionary beneficiary's lifetime.

Qualify as Lifetime income streams Do not qualify as Lifetime income streams
Immediate lifetime annuities (superannuation or non-superannuation) Account based pensions
Deferred lifetime annuities (superannuation or non-superannuation) Defined benefit income streams
Group self-annuitised products Asset test exempt income streams
Lifetime superannuation pensions Fixed term annuities

Income and assets test assessment

All lifetime income streams purchased on or after 1 July 2019 are assessed under new income and assets test rules. Grandfathering applies to lifetime income streams commenced prior to this date and they will continue to be assessed under the current means test treatment, ie asset tested (long term) income streams.

Under the new rules, lifetime income streams that comply with a 'capital access schedule' receive a reduced assessable value under the social security assets test. A capital access schedule limits the amount of capital that can be accessed as a voluntary commutation or death benefit. See 'Capital access schedule' below for more information.

For lifetime income streams purchased on or after 1 July 2019 that comply with the capital access schedule, the social security assessment is:

Assessable assets:

  • 60% of the purchase price88 assessable until age 8489 (or minimum five years90), then
  • 30% of the purchase price assessable for the remainder of their life.

Assessable income:

  • 60% of annual payment.
Example: Assets test

Joan purchases a lifetime income stream at age 66 for $100,000.

Under the assets test, 60% of the purchase price ($60,000) is assessable until age 84 (19 years), after which point 30% ($30,000) is assessable.

Example: Assets test

Bert purchases a lifetime income stream at age 83 for $100,000.

Generally 60% of the purchase price is assessable until age 84. However, as Bert is age 83, this would only be one year and there is a requirement that 60% is assessable for at least five years.

So in Bert's case, 60% of the purchase price ($60,000) is assessable until age 88 (five years), after which point 30% ($30,000) is assessable.

Example: Income test

Tom receives an annual payment of $10,000 from a lifetime income stream.

60% ($6,000) is assessed as income under the income test. As payments increase due to indexation, 60% of the indexed payments will be assessable for the duration of the lifetime income stream.

Capital access schedule

When the Government introduced 'innovative retirement income stream products' into the superannuation and tax legislation, restrictions were placed on the amount that could be commuted from the income stream.

Chart 1 demonstrates the maximum amount that can be commuted either voluntarily or on death, known as the 'capital access schedule'. In summary, the maximum amount that can be commuted as a voluntary surrender value is a declining straight line over the primary beneficiary's life expectancy (or reversionary beneficiary's life expectancy in certain circumstances). On death, the maximum amount that can be commuted is 100% of the purchase price within the first half of the primary beneficiary's life expectancy, then after this date the declining straight line value applies. No amounts can be commuted from the income stream once they reach their life expectancy.

The capital access schedule is important for social security purposes, as lifetime income streams that comply receive a reduced assessable asset value (ie 60% of the purchase price assessable until age 84 (or minimum five years), then 30% of the purchase price assessable for the remainder of their life).

Chart 1: Capital access schedule

The capital access schedule is the maximum commutation amount permitted under the legislation. However, individual products may provide a commutation amount that is significantly lower than this amount. For example, some lifetime annuities may have a nil amount that can be commuted voluntarily.

What if they do not comply with the capital access schedule?

Lifetime income streams purchased on or after 1 July 2019 that do not comply with the capital access schedule, that is, allow a higher amount to be commuted than the schedule allows, are assessed differently under the assets test.

In this case, the assessable asset value of the lifetime income stream is the higher of:

  • current or future surrender value
  • current or future death benefit
  • 60% of the purchase price assessable until age 84 (or minimum five years), then 30% of the purchase price assessable for the remainder of their life.

However, under the income test, they are assessed in the same way as other lifetime income streams, that is, 60% of the annual payment is assessable.

Deferred income streams

A deferred income stream is an income stream that commences payments more than 12 months after it is acquired.

For example, a member may purchase a deferred income stream at age 60 for $100,000 that does not commence paying an income stream until they reach age 80.

Under the deferred income stream rules, once the income stream payments commence, they must be paid at least annually for the remainder of the member's lifetime.

For social security purposes, the assessment depends on whether the deferred lifetime income stream is purchased with superannuation or non-superannuation money.

  Income test Assets test
Superannuation
  • No income assessable until payments commence
  • Once payments commence, 60% of annual payment assessed
Exempt until the later of:
  • Date income stream purchased
  • Date members satisfies condition of release (reaching age 65, retirement, permanent incapacity, terminal medical condition)

From this date, 60% of purchase price assessable until age 84 (minimum five years), then 30% assessable

Non-superannuation Financial investment (subject to deeming) until:
  • Date income stream commences (if below age pension age), or
  • Latest of:

- Date income stream purchased

- Date member reaches age pension age

From this date, no income assessable until payments commence, then 60% of annual payment assessed

Assessable asset until:
  • Date income stream commences (if below age pension age), or
  • Latest of:

- date income stream purchased

- date member reaches age pension age From this date, 60% of purchase price assessable until age 84 (minimum

Indexation of purchase price

When determining the purchase price of a deferred lifetime income stream that is paid for by one or more instalments, amounts paid for the income stream are indexed when determining:

  • for non-superannuation income streams - value of the financial investment assessable between the date of purchase and the assessment day
  • for superannuation and non-superannuation income streams - the purchase price on the assessment day.

When indexing the purchase price, amounts paid for the income stream are indexed on the 12 month anniversary of the purchase date.

The compound rate used for this calculation is the upper deeming threshold (currently 3.25% pa).

Reversionary lifetime income streams

When a lifetime income stream that commences on or after 1 July 2019 reverts to a reversionary beneficiary upon the death of the original owner, the income stream is assessed under the new means test rules.

a. Income test

For both superannuation and non-superannuation lifetime income streams, if payments have commenced before the income stream reverts, 60% of the annual payments will be assessable income for the reversionary beneficiary.

However, if the lifetime income stream reverts before payments have commenced (ie during the deferral period), the assessment differs depending on whether it is purchased with superannuation or non-superannuation moneys:

Superannuation

  • No income is assessable until payments commence. Once payments commence, 60% of the annual payment is assessable.

Non-superannuation

  • If the reversionary beneficiary has not reached their assessment day (see below), the income stream is assessed as a financial investment (assessable asset subject to deeming) until they reach their assessment day.
  • If the reversionary beneficiary reaches their assessment day, no income is assessable if payments have not commenced (ie during the deferral period). Once payments commence, 60% of the annual payment is assessable.

b. Assets test

For both superannuation and non-superannuation lifetime income streams, if payments have commenced before the income stream reverts, 60% of the purchase price is an assessable asset for the reversionary beneficiary.

However, if the lifetime income stream reverts before payments have commenced (ie during the deferral period), the assessment differs depending on whether it is purchased with superannuation or non-superannuation moneys:

Superannuation

  • If the reversionary beneficiary has not met their assessment day (see below), no asset value is assessable.
  • If the reversionary beneficiary has met their assessment day (see below), 60% of the purchase price is an assessable asset until they reach their threshold day (see below), then 30% of the purchase price92 is assessable.

Non-superannuation

  • If the reversionary beneficiary has not met their assessment day (see below), the income stream is assessed as a financial investment92 (assessable asset subject to deeming) until they reach their assessment day.
  • If the reversionary beneficiary has met their assessment day (see below), 60% of the purchase price is an assessable asset until they reach their threshold day (see below), then 30% of the purchase price is assessable.

Assessment day

Where the lifetime income stream reverts before income stream payments have commenced (eg deferred annuity that has not commenced payments), the assessment day differs depending on whether it is purchased with superannuation or non-superannuation moneys.

The below outlines the assessment day for superannuation and non-superannuation lifetime income streams that revert before income stream payments have commenced.

Superannuation
  Assessment day
If payments commence before the reversionary beneficiary meets an eligible condition of release Date payments commence
If payments commence after the reversionary beneficiary meets an eligible condition of release Later of:
  • Date of reversion
  • Date reversionary beneficiary meets an eligible condition of release (reaching age 65, retirement, permanent incapacity, terminal medical condition)
Non-superannuation
  Assessment day
If payments commence before the reversionary beneficiary reaches age pension Date payment commences
If payments commence after the reversionary beneficiary reaches age pension age Later of:
  • Date of reversion
  • Date of reversionary beneficiary reaches age pension age

Threshold day

The threshold day is the day the asset value of the lifetime income stream steps down from 60% to 30% of the purchase price.

For lifetime income streams that revert on the death of the original owner, the threshold day will be:

  • same as original owner, if the original owner had reached their assessment day
  • based on the reversionary beneficiary's age, if the original owner had not reached their assessment day.

See the 'Deferred income streams' section above for the definition of 'assessment day' for superannuation and non-superannuation income streams.

Investment type life policies

As part of the changes to the assessment of lifetime income streams, changes were made to the way that lifetime income streams that contain insurance are assessed.

Prior to 1 July 2019, social security assessed a life policy with a surrender value as an assessable asset. The assessable asset value is the surrender value of the policy.

However under new rules, life insurance policies acquired on or after 1 July 2019 that are:

  • acquired by a person on or after age pension age, and
  • the premium paid in any 12 month period exceeds 15% of the maximum death benefit payable

have an assessable asset value that is the greater of:

  • the surrender value
  • the sum of premiums paid less commuted amounts.
The change to the assessment of investment type life policies acquired on or after 1 July 2019 has important implications for products that meet the qualification criteria.

In most cases, the premiums paid for the policy will exceed the surrender value, resulting in a higher assessable asset value for social security purposes than under the pre-1 July 2019 rules.

Last modified: Wednesday, July 24, 2019