How lifetime annuities have changed

A common concern that clients have about ‘locking away’ money is the ability to access it later. For clients who want flexibility in case their circumstances change, they have the option of a withdrawal benefit with their annuity:

• Clients can access a lump sum amount from their investment during a ‘withdrawal period’ that is based on their life expectancy
• The maximum withdrawal amount starts at 100% and reduces gradually to zero over the withdrawal period*
• Clients can choose to remove this feature in return for higher payments from their annuity

A guaranteed death benefit is payable to your clients’ nominated beneficiaries, or to their estate during the withdrawal period (so long as they do not withdraw their annuity). 

Optimising your clients’ Age Pension entitlement

The means testing of lifetime income streams, including lifetime annuities, has changed over time based upon when a lifetime annuity commenced. Certain lifetime annuities commenced before 20 September 2004 are 100% asset test exempt. Certain lifetime (and life expectancy) annuities commenced before 20 September 2007 are 50% asset test exempt. Lifetime annuities commenced before 1 July 2019 feature a reducing assessable value over life expectancy (known as the ‘deduction amount rules’). The income test assessment of lifetime income streams commenced before 1 July 2019 has generally been to allow the deduction amount rules to reduce annual income. 

It is important to note that while ‘new’ rules might apply for income streams starting after a certain date, existing lifetime income streams have generally maintained the means testing rules applicable at the commencement of the income stream and these rules generally continue to apply for the life of the income stream.

As of 1 July 2019, under the social security income test, only 60% of any payment your client receives from a lifetime income stream is assessable as income for social security purposes. And, under the social security assets test, generally only 60% of the purchase price of a lifetime income stream (including a lifetime annuity) will count as an asset through to age 84, or for a minimum of five years. From that point onwards only 30% of the purchase price counts as an asset. This is different to many other types of investments, where 100% of the asset is assessable.

Using the income and assets test strategy zones

Taking into account the means testing of lifetime income streams, we developed a ‘strategy zones’ chart. The chart provides a useful snapshot of the areas in which advice strategies could improve Age Pension outcomes for different clients. Clients in the income test strategy zone, for example, could benefit from strategies which reduce assessable income for the purposes of means testing. Clients in the assets test strategy zone, could benefit from strategies which minimise their assessable assets.

Strategy one: Immediately increasing a client’s asset tested part Age Pension

Because the assets test generally takes into account only 60% of any lifetime annuity investment up until age 85 (or for a minimum of five years), purchasing a lifetime annuity could reduce their assessable assets and provide an opportunity to increase their Age Pension entitlement immediately. For asset sensitive clients, a $100,000 investment in an annuity will reduce their assessable assets by $40,000. This $40,000 reduction in assessable assets could, in turn, increase your clients’ Age Pension by $3,120 (or 3.12% of the $100,000 invested) in the first year alone.

Strategy two: Reducing a client’s assessable assets below the assets test cut-off to allow them access to a part Age Pension

For asset test sensitive clients who don’t currently qualify for the Age Pension because their assessable assets are above the cut-off levels (for example couple homeowners with more than $1,003,000), the purchase of a lifetime annuity provides an opportunity to reduce their assessable assets and gain access to the Age Pension for the first time.

To see if your client is eligible for an immediate increase to their Age Pension, you can use our Age Pension Illustrator tool.