Tax loophole concerns for deferred lifetime annuity reforms
Developing a market for deferred lifetime annuities (DLAs) requires the Government to adopt a higher-level approach according to The Actuaries Institute chief executive, Melinda Howes, but it could create a tax loophole for financial planners and product developers.
Howes said there were a number of challenges to developing a deeper and more innovative market for DLA products including the conflicting requirements of social security laws, superannuation laws and tax laws.
"It's all too black and white and we need to take it to the level above and have a more principles-based approach that would allow product development," she said.
However conversations with Treasury had revealed that although looser legislation would encourage further product development, the risk was in encouraging tax evasion.
"If you free up the tax laws and say any product that looks like this we're not going to tax, it could bring into that umbrella of tax-free products, more products than they were actually anticipating which obviously has a direct impact in government funding," Howes said.
"The concern with that is that if you have a higher-level approach there might be loopholes or tax strategies that planners or product providers can find to exploit," she said.
Howes said it was great that the biggest impediment to product development had been removed but the finer details still needed attention.
Additionally, research into behavioural finance had shown investors saw deferred lifetime annuities as a risky gamble rather than insurance. Howes said bulk advice software that packaged DLAs with account-based pensions was useful in leading investors through the benefits of DLAs.
"These things really have to be sold, not bought — it's that classic insurance treatment," she said.
"They are willing to give up some current standard of living to secure that (future) but they don't see deferred annuities product on its own that way," she said.
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