The Government released this morning the much heralded and long awaited tax rules for lifetime annuity products, as the framework for these new products tracks for its promised 1 July 2017 start.
The Murray report in 2015 recommended superannuation policy settings be adjusted to address the emerging gap between retirement savings and increasing life expectancies. The existing rules allow an earnings tax exemption for superannuation pensions, but only once they are currently payable, and subject to minimum draw-down requirements. That doesn’t encourage people to protect against ‘longevity risk’, that is, the risk of outliving your super.
To be clear only our good Government, as the provider of age pensions, would see ‘risk’ in us living too long! Most of us would happily take that risk on; but Government, pensioners and product providers alike can see sense in making provision for this ever more likely eventuality.
So the idea that the Government has now taken up is to promote longevity products through the earnings tax exemption for superannuation pensions. The exemption will be extended beyond currently payable pensions, to the earnings on assets supporting deferred pensions (or ‘annuities’) that meet the regulations criteria released in draft this morning.
Although commencement of pension payments can be deferred until much later, the earnings tax exemption for these products will commence upon retirement, incapacity or at age 65. Earnings on assets still accumulating would otherwise be taxed at 15%.
Deferred Ppensions must be payable, once they commence, for life. There won’t be a minimum draw-down, but pensions will only be commutable in full if a pensioner dies before half-way (from retirement age or later purchase of the product) to average life expectancy. Aside from that pensions can be commuted only at a diminishing rate, with a nil commutation value at full life expectancy. Even then integrity rules will prevent commutation values being manipulated to provide estate planning benefits.
Only large funds and life insurance companies will be allowed to issue deferred annuities. SMSF’s will not. Like other superannuation pensions, these products will also be subject to the $1.6 million cap.
The regulations will however leave room for extensive product innovation; for example, returns by reference to market returns or the mortality profile of an age cohort. Returns can be guaranteed or not guaranteed. Pension payments, although they must be continuous once they begin, need only be at least annual.
Needless to say, product providers will stand ready to meet demand.