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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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