Superannuation funds—along with retirees, impending retirees, and financial advisers—have had to cope with the substantial changes to the means test for the Age Pension that came into effect on 1 January 2017.
More changes are in the works. The Department of Social Services (DSS), aided and abetted by the Treasury and the Government Actuary, has been looking at the means test settings for longevity products. This examination has included longevity products already in the market, such as annuities and group self annuitisation arrangements, and possible new products, such as deferred annuities and other innovative products.
The trigger for this review, apart from the never ending desire of government to keep Age Pension expenditures under a tight rein, is the promised introduction of a CIPR/My Retirement regulatory regime. While prudential and taxation arrangements have been put in place, the missing piece in the regulatory puzzle for CIPRs is their treatment in the Age Pension means test.
The main market for CIPRs is likely to be individuals who qualify for at least a part Age Pension. The means test treatment therefore will be crucial for retiree interest in CIPRs and any other innovative retirement products providing protection against the financial consequences of longevity.
The DSS look at the means test settings has been long and hard. It has been long in the sense that a discussion paper on the topic was issued in early 2017 and they took about a year to come up with a position paper. The look was hard, in that DSS has been trying to map means test parameters relevant to account-based income streams to pooled arrangements which share longevity risk. This has been further complicated by the current means test having a range of peculiarities, such as thresholds for assets and income below which there is no impact on the Age Pension, and then relatively high withdrawal rates of benefits, and not a great deal of consistency between the assets and the income test.
The review of the means test would have been quicker and easier if it had been restricted to just new products, such as deferred annuities. However, DSS for some time has not been comfortable with the “vibe” of the current means test treatment of life annuities. While 100 per cent of the purchase amount for such annuities is counted against the asset test in the year of purchase, this currently decreases over the life expectancy of the purchaser to zero. For the minority of people living beyond the average life expectancy, the capital amount is treated as zero. On the other hand, once a person reaches life expectancy all of their annuity payment is treated as income, with no amount deducted for return of capital.
Such an approach is not peculiar to Australia with such straight line schedules common in other countries in tax and like contexts. It might look a bit odd, but it is all about averaging and the fact that some people die before the average life expectancy and never are able to fully deduct the purchase price of annuity.
What seems likely as a replacement, at least for newly purchased annuities and like longevity products, is a set of parameters which have more fixed deduction amounts for both income and asset calculations. For reasons too technical and tedious to go into, the figure does not come out at 50 per cent even though that sounds like an average over the time an annuity is paid.
DSS is proposing that the asset test take into account 70 per cent of the purchase price up until life expectancy and then 35 per cent after then. For income, they propose a uniform inclusion in the income test of 70 per cent of the payment received.
Analysis by ASFA and others suggests that these sorts of numbers are a bit on the high side. For instance, someone who purchases a life annuity at age 65 would need to live to 107 to receive full recognition for the return of capital. It is unlikely that many people will achieve that, even with increasing longevity.
ASFA will continue to fight the good fight for the right means test settings for longevity products. If inappropriate means test settings are put in place, there will be fewer people who put in place private arrangements to deal with longevity, more will be spent on the Age Pension, and CIPRs may end up not widely adopted or even not adopted at all.