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There’s no doubt the Budget had a strong emphasis on retirement planning, with the requirement for superannuation trustees to develop and offer their members 'Comprehensive Income Products for Retirement' (or CIPRs for short) of particular interest.
Combined with new rules as to how some of these products are assessed under social security means testing from 1 July 2019, it’s clear that the retirement income landscape is set for change.
So why have these measures been put forward by the Government and what do they mean for you?
Superannuation funds required to consider retirement income
A higher standard of living for retirees is a key motivation for the changes to superannuation law. Whilst Australia’s compulsory superannuation system has been effective at building up savings for retirement, it has not made it easy for retirees to access solutions that deliver reliable income for life after retirement.
Therefore, superannuation funds will now be required to develop retirement income strategies for their members, and offer CIPRs that will provide their members income for life, no matter how long they live.
As superannuation funds await a position paper from the Government for consultation, the development of new retirement income products, such as deferred lifetime annuities, will give retirees more choice and flexibility and are an essential building block for CIPRs.
Challenger Chief Executive Officer Brian Benari said the announcements 'signalled a major step forward for the retirement phase of superannuation. They demonstrate the Government’s commitment to developing a superannuation system that better meets the needs of Australia’s retirees by ensuring pooled lifetime income stream products become a mainstream option in retirement.'
Lifetime income streams set for changes to means testing assessment
The Government also announced new means test rules for lifetime retirement income stream products from 1 July 2019. A fixed 60% of all lifetime income stream payments will be assessed as income for Age Pension eligibility. 60% of the purchase price of the product will be assessed as an asset until the age of 84 (or a minimum of 5 years), and then 30% for the rest of the person’s life.
The aim is to encourage more retirees to consider these lifetime income products, provide clarity around future treatment and provide a foundation for product providers to develop new retirement income stream products.
Changes to personal income tax bracket thresholds set to help retirees
The Government has announced a seven-year personal income tax plan intended to deliver tax relief to both retirees and others. The first step of this tax plan will deliver tax relief to low and middle income earners, worth up to $530 p.a. in 2018-19. The second step will protect against bracket creep and the third step will make personal taxes simpler and flatter. These measures will assist eligible retirees with a reduced tax liability in retirement and may help them achieve retirement objectives.
Expanding the Pension Loan Scheme
One last measure to note is the expansion to the Pension Loan Scheme, a scheme that allows asset-rich but cash-poor retirees, who own their home but miss out on maximum pension payments, to top up their pension income stream via a loan from the government.
From 1 July 2019, the Government will expand eligibility to this scheme to include all Australians of Age Pension age. The loan provides a regular fortnightly pension payment of up to 150 percent of the maximum pension rate.
Eligible pensioners who take up this option are able to repay the loan at any time or on the sale of the property and a fortnightly compounding interest rate of 5.25% currently applies.
Important information: This information is general information only and does not take into account any person’s objectives, financial situation and needs. Before making an investment decision, talk to your financial adviser or visit www.challenger.com.au for more information. This article first appeared on www.nine.com.au.