The changes to the means testing of lifetime income streams from 1 July, 2019 presents a significant opportunity for retirement advice. The means testing changes provide an immediate exemption under the assets test where the lifetime income stream meets a capital access schedule. This means an asset-tested retiree can immediately increase their Age Pension entitlement by investing in a lifetime income stream. In this article we look at the retirement advice opportunity and the immediate benefits for asset-tested retirees.
MEANS TESTING CHANGES TO LIFETIME INCOME STREAMS
Means testing changes apply to lifetime income streams commenced on or after 1 July, 2019 with lifetime income streams commenced before 1 July, 2019 grandfathered under the previous means testing rules. Means testing changes do not apply to fixed term income streams, account-based pensions, defined benefit income streams or asset-test exempt income streams.
Under the income test, 60% of the gross payment from the lifetime income stream is the income assessed. For deferred lifetime income streams, 60% of the gross payment will generally be assessed after the deferral period when payments commence.
Under the assets test, the assessed asset value is determined by the lifetime income stream meeting the capital access schedule. The capital access schedule restricts voluntary withdrawals and death benefits payable from the lifetime income stream.
Chart 1 (page 41) provides the capital access schedule.
The maximum voluntary withdrawal is a percentage of the purchase price declining in a straight line from 100% at commencement to 0% at life expectancy. The maximum death benefit is 100% of the purchase price from commencement until half of life expectancy and then equals the maximum voluntary withdrawal thereafter.
Where the lifetime income stream meets the capital access schedule, the assessed asset value will be 60% of the purchase price from the commencement date until age 84 (or for a minimum of five years) and then 30% of the purchase price thereafter.
Where the lifetime income stream does not meet the capital access schedule, the assessed asset value is the greater of the following:
- Some 60% of the purchase price from the commencement date until age 84 (or for a minimum of five years), then 30% of the purchase price thereafter;
- Any current or future surrender value; and
- Any current or future death benefit.
Example
Henry is age 67 and invests in a lifetime income stream with $100,000 which meets the capital access schedule. The lifetime income stream pays $4,717 in the first year indexed to inflation for the rest of his life.
Chart 2 provides the assessed asset value and assessed income from his lifetime income stream.
The assessed asset value of his lifetime income stream is $60,000 (60% of the purchase price) until he reaches age 84 and then reduces to $30,000 (30% of the purchase price) thereafter. The assessed income from his lifetime income stream is $2,830 (60% of the gross payment) in the first year.
REDUCING ASSESSABLE ASSETS WITH LIFETIME INCOME STREAMS
The Age Pension is subject to an income and assets test, with the test producing the lower amount determining the amount payable. Under the assets test, the Age Pension reduces at a rate of $3.00 p.f. for every $1,000 of assessable assets above the lower assets test threshold.
If an asset-tested retiree invests $100,000 in a lifetime income stream which meets the capital access schedule, their assessable assets will immediately reduce by $40,000 (40% x $100,000). Assuming the retiree is still asset-tested after the reduction, their Age Pension entitlement will immediately increase by $3,120 p.a. (40 x $3.00 p.f. x 26).
The relative increase in Age Pension entitlement will change in future years depending on the assessed asset value of comparable assets such as account-based pensions. The retiree may also become income-tested in future years at which point the relative increase in Age Pension entitlement will depend on their assessable income.
Case study 1
Diane and Desmond are a couple, both aged 66, own their home and are recently retired. They have $300,000 each in deemed account-based pensions, $50,000 in cash and term deposits and $20,000 in personal contents.
Diane and Desmond are spending retirement income of $60,000 per annum which includes a combined Age Pension entitlement of $14,812 per annum . Their Age Pension entitlement is currently determined under the assets test.
Diane and Desmond withdraw $75,000 each from their account-based pensions and invest in lifetime income streams which meet the capital access schedule. The combined lifetime income streams pay $6,649 in the first year indexed to inflation for the rest of their lives.
Table 1 compares their estimated Age Pension entitlement over the next five years.
By purchasing lifetime income streams, Diane and Desmond have immediately reduced their assessable assets by $60,000 (40% x $150,000). As a result of the reduction in assessable assets, their Age Pension entitlement has immediately increased to $19,773 per annum.
The benefit for asset-tested retirees of purchasing lifetime income stream which meet the capital access schedule will depend on their assessable assets. Where they have assessable assets above the assets test cut-off, their Age Pension entitlement will only start increasing when their assessable assets reduce below the assets test cut-off. Where they become income-tested after reducing assessable assets, their Age Pension entitlement will depend on their assessable income.
Case study 2
Edith and Eric are a couple, both aged 66, own their home and are recently retired. They have $400,000 each in deemed account-based pensions, $50,000 in cash and term deposits and $20,000 in personal contents.
Edith and Eric are spending retirement income of $60,000 per annum which does not include any Age Pension entitlement. They do not receive any Age Pension entitlement because their assessable assets exceed the assets test cut-off.
Edith and Eric withdraw $20,000 each from their account-based pensions and invest in lifetime income streams which meet the capital access schedule. The combined lifetime income streams pay $1,773 in the first year indexed to inflation for the rest of their lives.
Table 2 compares their estimated Age Pension entitlement over the next five years.
By purchasing lifetime income streams, Edith and Eric have immediately reduced their assessable assets by $16,000 (40% x $40,000). As a result of the reduction in assessable assets, they will start to receive an Age Pension entitlement of $2,002 per annum. They will also become entitled to the Pensioner Concession Card.
Sean Howard is the technical services manager at Challenger.
