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Since coming to office in 1996, the Federal
Government has made four major announcements regarding the superannuation
system. The latest was in February 2004 when it released a policy
paper entitled 'A more flexible and adaptable retirement income
system' which outlined several measures to improve the accessibility
of retirement income streams to workers aged over 55.
These changes were introduced in the Superannuation Industry
(Supervision) Amendment Regulations 2005 (No.2) and have now
become law. They are effective from 1 July 2005.
Background
Prior to 1 July 2005, superannuation benefits were generally
required to be unrestricted and non-preserved in order to commence
an income stream. Most people aged over 55 and still working
would have either preserved or restricted non-preserved benefits
and therefore would need to meet a 'condition of release' in
order to commence an income stream.
The most common conditions of release for workers in this age
bracket were:
- permanently retiring from the workforce,
- terminating gainful employment with an employer who had
contributed super on their behalf, or
- attaining age 65.
The policy concern was that these fairly strict rules were encouraging
people to retire or leave their jobs prematurely merely to access
their superannuation benefits.
What's changed
From 1 July 2005, workers aged over 55 but under 65 will be
able to access their preserved superannuation benefits without
having to retire or leave their job. However there are still
some important restrictions and the measures may have social
security, RBL and other financial planning implications.
The key restriction for people wanting to take advantage of
the new rules is that benefits must be accessed using:
- a 'complying' lifetime, life expectancy or market-linked
pension, or
- a non-commutable allocated pension or annuity.
Complying lifetime income streams
Complying lifetime income streams are designed to provide regular
income payments for the duration of a person's life (or a reversionary
beneficiary). They can be indexed to increase each year, either
by a fixed percentage or in line with inflation, but generally
cannot be commuted.
Complying life expectancy and term certain income streams
Complying life expectancy (or term certain) income streams make
payments to a person over a fixed period of time that is at
least as long as their life expectancy. There is generally no
investment choice and payments are fixed, or indexed to the
CPI, at the start of each financial year.
Complying market-linked income streams
Complying market-linked income streams (sometimes called term
allocated pensions or TAPs) are a relatively new account-based
retirement income product which is similar in structure to an
allocated pension. They allow you to maintain investment control
during retirement but unlike a normal allocated pension, the
payments are fixed at the start of each financial year. The
Government has accorded them 'complying' status which means
they qualify for a 50% exemption from the assets test for Centrelink
purposes and attract the higher pension reasonable benefit limit
(RBL).
Non-commutable allocated income streams
A non-commutable allocated pension is a pension which meets
the standards of an allocated pension, but whose rules ensure
that if the pension is commuted, the resulting ETP cannot be
taken in cash, except in limited circumstances.
Commutability
As a general rule, complying pensions and annuities cannot
be commuted and taken as a lump sum. Non-commutable income
streams can be commuted within the first six months of commencement
provided the pension or annuity is not funded from the commutation
of another income stream.
If a non-commutable income stream is commuted using the six
month cooling off period, the benefit must be rolled back into
the accumulation phase or transferred into another non-commutable
income stream unless a condition of release is met. This provides
some flexibility which could be advantageous to persons whose
financial circumstances are likely to change, or those who may
no longer need as much income.
Social security
Superannuation assets are generally income and assets test exempt
for social security clients under Centrelink /DVA Age Pension
age. For clients under Age Pension age, transferring preserved
superannuation benefits into a complying income stream will
result in a 50% exemption from the assets test however non-commutable
income streams will be fully assessed. In both cases, gross
income less the deductible amount will be assessed under the
income test.
Reasonable Benefit Limits
Commencing an income stream under the new rules will be reportable
for RBL purposes. Any subsequent commutations will also be reported,
including rolling back into the accumulation phase of superannuation,
cashing out and rolling over into another income stream.
Financial planning implications
The new rules will allow people who wish to continue working
after the age of 55 to access preserved superannuation benefits
in the form of a complying or non-commutable income stream.
The policy objective is to encourage older workers to stay in
the workforce and transition to retirement in a gradual way.
In deciding whether to take advantage of these new options,
clients and advisers need to give careful consideration to the
following financial planning issues:
- Accessing superannuation benefits prior to normal retirement
age may result in a reduced capacity to meet future retirement
income needs.
- Moving superannuation money from the accumulation phase
to the income phase can increase the amount of assets that
are means tested for social security purposes.
- Commencing an income stream may have adverse tax consequences
although this can be mitigated in many cases through other
arrangements.
- Commencing and income stream may result in tax advantages
if done in conjunction with an effective salary sacrifice
arrangement. The Tax Commissioner has stated that the general
anti-avoidance provisions of Part IVA of the Tax Act will
not apply where taxpayers are simply commencing a transition
to retirement pension and making salary sacrifice contributions
to superannuation.
- Commencing an income stream may impinge on other financial
planning strategies, particularly recycling or contribution
strategies.
- Using a complying income stream rather than a non-commutable
allocated pension to access your superannuation benefits
may create problems in the future due to the stricter limitations
on commutation.
- For business clients and those concerned about protecting
assets from creditors or possible legal action, accessing
superannuation benefits before age 65 may not be appropriate.
Summary
The changes contained in the Superannuation Industry (Supervision)
Amendment Regulations 2005 (No. 2) extend the Federal Government’s
reforms to the superannuation system.
The measures should make it easier for pre-retirees to transition
gradually to retirement and will encourage them to supplement
their income through part-time work rather than leaving the
labour market altogether.
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