Low take-up tipped for new government retirement initiatives

The innovative income stream products covered by the government’s draft regulations are expected to attract little attention, with retirees likely to be deterred by the lock-in clauses of these products, according to one lawyer.

Minister for Revenue and Financial Services Kelly O’Dwyer announced yesterday that the government had released draft superannuation income stream regulations and an explanatory statement for public consultation.

“The regulations, when made, will continue the implementation of the government’s superannuation taxation reforms and introduce a new set of design rules for lifetime superannuation income stream products that will enable retirees to better manage consumption and longevity risk in retirement,” Ms O’Dwyer said.

“The regulations are intended to cover a range of innovative income stream products including deferred products, investment-linked pensions and annuities, and group self-annuitised products.”

Ms O’Dwyer said superannuation funds and life insurance companies will receive a tax exemption on income from assets supporting these new income stream products, provided they are currently payable or, in the case of deferred products, held for an individual who has reached retirement.

“These new rules will remove taxation barriers to the development of new products that will provide greater flexibility in the design of income stream products to give more choice to consumers, while ensuring income is provided throughout retirement.”

Townsends Business & Corporate Lawyers special counsel Michael Hallinan said the new rules will only apply to large APRA-regulated funds and not SMSFs.

“So SMSFs and small APRA funds won’t be able to issue these types of products, and the reason is that these products are basically [classified] as defined benefit products and you can’t issue defined benefit type interests in SMSFs,” Mr Hallinan said.

The products covered by this draft legislation will be complicated and the take-up may not be as significant as the government believes it will be, he said.

“The fundamental problem with these products is that they all depend on pooling, which means that they’ve got to sell a minimum number and some lives will drop short and others will last longer. The profits rising from those that drop short will be used to finance the payments to those that last longer.”

Mr Hallinan said it will also be difficult to exit freely from these products because they depend on scale and people subsidising each other.  

“I think there will be a lock-in factor and I think it will be complicated to understand and to explain. I think people will be very fearful not having their account balance passing to their estate,” he said.

Mr Hallinan said if the government is concerned by the longevity of income streams, a better solution would have been to reduce the pension drawdown rates.

“One of the problems with current account-based pensions is that as you get fairly old, the minimum drawdown rate increases quite dramatically. So one solution to allow the income stream to last longer would be to lower those minimum drawdown rates.” 

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