Australia’s retirement system on collision course with property market

From The New Daily

Australia’s retirement income policy is on a collision course with trends in home ownership and the result will be more older Australians struggling to support themselves in retirement. It will also make the superannuation system more inequitable.

The housing price boom is causing a major social change in Australia and the results of it are not being factored into policy making.

The latest figures from the 2016 census show that home ownership dropped markedly. Households renting rose to 30.9 per cent of the total, compared to 29.6 per cent in mid-2011. In the late 1980s, only 26.9 per cent of households rented.

Households owning outright dropped most markedly, from 32.1 per cent to 31 per cent while those owning with a mortgage dropped from 34.9 per cent to 34.5 per cent of households.

That is bad news for retirees because it means that more people will find themselves renting as they give up work.

“It’s a big thing because the family home is exempt from the pension assets test,” Grattan Institute research fellow Brendan Coates said.

“If you don’t own a home you will have to put aside more money to support yourself in retirement because of rental costs.”

The Association of Superannuation Funds of Australia recently found that to afford a comfortable retirement in a capital city a couple would need more than $1 million saved. That’s almost double needed by a couple who owned their home.

The trouble with saving large amounts like that is that it puts you outside the limits of the age pension assets test.

“Now most people in retirement get the pension,” Mr Coates said.

Holding a lot of assets outside the home means your pension will be discounted once you trigger the assets tests limits. And recent changes have made the situation worse.

In January this year, assets test limits for part pensions were cut by around $200,000. For single non-home owners the new limit is $747,000 and for couples $1 million, compared with $943,250 and $1.32 million previously.

So retiring without a home means many people will get less from the pension while they run down their retirement assets and will face rising rents as time goes by.

As this table from the Grattan Institute shows, renting leaves people far more vulnerable to financial stress.

While many renters on a pension may be be eligible for Commonwealth rent assistance, it maxes out at $132.20 per fortnight for a single and $124.60 for couples. Rents for a two-bedroom apartment average between $593 a week in Sydney and $329 in Adelaide (less in the regions), and have grown at around 1.6 times the rate of inflation over the past 30 years.

So being a renter will increasingly squeeze your income as your savings diminish and welfare won’t bridge the gap.

The toughening of the assets test and the rise of renting retirees “brings into stark contrast the treatment of home owners and non-home owners”, Mr Coates said.

Currently about half of age pension payments go to people with more than $500,000 in assets and 20 per cent to those with more than $1 million, most of whom are home owners.

It will also widen the gap between home owning and non-home owning superannuants as those without homes will struggle to build balances and have to spend what they have quicker to pay their housing costs.

Older Australians face housing crisis

From The New Daily.

Australian retirees will face a housing crisis within 15 years unless urgent action is taken, according to the Council on the Ageing.

The lobby group for seniors hosted a policy summit in Canberra in recent days where it drew attention to the impact on older Australians of rising prices, rising rents, huge mortgage debt and the scarcity of suitable homes.

The assumption that Australians retire in a home they own underpins the nation’s superannuation and pension systems, but summit attendees heard this could be under serious threat in as little as 10 to 15 years.

Keynote speaker John Daley, CEO of the Grattan Institute, warned that the looming housing crisis is a “ticking time bomb” for this demographic.

“We must address these issues immediately if we want to stand a fighting chance to mitigate the severity of the looming housing affordability crisis and to safeguard the future of older Australians before it is too late,” Mr Daley said.

The summit heard a key threat is that more Australians are entering retirement with mortgage debt, which they typically pay off in a lump sum from their superannuation.

Others enter retirement while still renting, which radically increases the amount of disposable income they need to cover monthly expenses.

The Association of Superannuation Funds of Australia, which represents both for-profit and non-profit funds, has estimated that couples who rent for life in the eight capital cities will need at least $1 million to retire comfortably.

In Sydney, a renting couple would require a lump sum at retirement of $1.16 million, almost double the $640,000 a couple who own their home debt-free would need, ASFA found.

The huge disparity is due solely to the ongoing costs of renting. For example, a 65-year-old Sydney couple who own their home will spend — if they live comfortably — about $60,000 a year, compared to almost $80,000 for a renting couple.

The problem is even worse for age pensioners. The 2017 Rental Affordability Snapshot report by Anglicare Australia found only 6 per cent of the market was affordable for a single older person living on the age pension.

The forum also discussed the growing incidence of homelessness among older people, especially women; and the implications for age pensioners of unaffordable rental properties in the cities.

COTA chief executive Ian Yates said older Australians are increasingly disadvantaged by the lack of supply of affordable housing that meets the physical needs of older residents.

“Older Australians are increasingly falling through the cracks in the growing housing affordability and supply challenge, with a growing number of older Australians needing to rent, rather than owning a home outright,” Mr Yates said.

“We are already starting to see rates of home ownership by older Australians decline, and this is forecast to drop even further in the next 10-15 years.

“This trend is already exerting extra pressure on the rental market and on many older Australians who are struggling to pay their rent, while also juggling other rising expenses like energy.

“There is a whole group of people currently in their 50s and 60s who will be retiring as renters, or if they are lucky enough to own a house, facing the prospect of retiring with a mortgage.”

An Australian researcher has estimated that anyone who doesn’t have a mortgage by the age of 45 will probably be renting in retirement, due to price growth outpacing savings, the risks of sickness and unemployment, and the difficulty of convincing a bank to provide a home loan.

The COTA summit also heard from Dr Ian Winter at the Australian Housing and Urban Research Institute; Judith Yates from the University of Sydney; Jeff Fiedler from Housing for the Aged Action Group; and Paul McBride from the Department of Social Services.

Many of the same themes were covered in a recent report by consulting firm KPMG. It confirmed that it will be very difficult for older Australians to be debt free in later years, largely because of housing costs.

ABC The Business Does Superannuation Fees

The ABC The Business segment on superannuation fees underscores the recent Rainmaker report. During the last 10 years Australians have paid around $230-billion in fees to superannuation funds and over the next 10 years, those fees are set to double.

in 2016 Australians paid $31 billion in fees on $2.2 trillion of superannuation. That amount of fees is about the same as the cost to the government of superannuation tax concessions, and more than half the $45 billion spent on income support for the elderly.

Of that $31 billion in fees, the for-profit sector (which also includes self-managed super funds) ends up with $28 billion, or 91 per cent, Rainmaker found.

Using Super to Save for a Deposit Clashes with Retirement Needs

From The New Daily.

Consultancy firm KPMG has thrown into question the legality of the Turnbull government’s budget measure to allow first home buyers to use superannuation to save for a deposit.

In its Super Insights Report, released on Wednesday, KPMG said the policy, which would allow home savers to salary sacrifice up to $15,000 a year into their existing super fund, was “difficult to reconcile” with the government’s own definition of the purpose of superannuation.

“Arguably, policies to address housing affordability do not fit comfortably within their proposed primary subsidiary objectives of superannuation.”

The Turnbull government introduced draft legislation in 2016 stating that the purpose of super was to substitute or supplement the age pension. It is yet to pass Parliament.

Labor has also seized on the issue, with Shadow Financial Services Minister Katy Gallagher branding the measure “inconsistent” with the proposed definition.

The KPMG report also called for a national debate to determine whether super should be able to be passed on through wills and whether it should be directed for national purposes like infrastructure.

The report found that industry super funds have caught up with their retail competitors, creating an even split between the two at the top end of Australia’s super system.

But while large funds are getting larger, there are still too many smaller funds which need to be consolidated, according to KPMG.

The report also found that the 9.5 per cent super guarantee (SG) needed to be lifted as it is not sufficient to provide the 65 per cent of working income considered adequate for retirement.
“The 9.5 per cent is a good starting point but you need to keep building,” KPMG actuarial partner Michael Dermody said.
However the planned increases in the SG to 12 per cent from 2025 will help provide adequate retirements.

“KPMG has calculated that a person on average earnings who starts their career after 2006 and works for 40 years will retire with a superannuation balance of more than $545,000,” he said.

“That is the level estimated to be needed for what the Association of Super Funds Australia has defined as a ‘comfortable’ standard of retirement living.”

The industry fund sector has been growing faster than the retail funds over the past decade and this is now almost on a par with its main competitor. When the other not-for-profit fund types, public sector and corporate, are added in they easily outstrip their for-profit competitors.

However self-managed super funds have also been a major growth area over the period and now have more assets under management than either retail or industry funds. The not-for-profit sector collectively still outstrips the SMSF sector however.

Super sector makeup. Source: KPMG

However, the member profile of fund types varies quite dramatically. Industry funds have a much younger profile resulting in much lower withdrawals and higher levels of net contributions.

The industry funds also appear to have lower-income members with the vast majority of contributions coming from employers under the SG. For the retail funds, however, more than one-third of contributions come from members themselves.

The net inflow of industry funds of $19 billion yearly is over 40 per cent larger than the $12 billion reported by retail funds.

The super gender equation. Source: KPMG

The gender divide remains an ongoing concern in superannuation with women in the 45 to 64 cohorts holding significantly less in their super accounts than men. The differential is driven by the gender wage gap and women’s disrupted career patterns as a result of caring responsibilities for children and the aged.

The workforce is still very gender segmented with building industry funds, Cbus and BUSSQ, reporting 92 per cent and 94.2 per cent male members. Meanwhile, health industry fund HESTA and pharmacists fund Guild Super report 80.7 per cent and 86.4 per cent female members, respectively.

KPMG wealth management partner Manish Prasad told The New Daily: “There is a shift to more equal positions between the retail, industry and public sector funds.

“Account numbers are flattening out with the industry rationalising, the introduction of [the ATO’s] Super Stream and the government’s lost account portal starting to work.”

Government may water down private super borrowing restrictions

From The NewDaily.

The Turnbull government has taken planned restrictions to borrowing by self-managed superannuation funds off the agenda in the short-term in a move that may presage a weakening of the proposals.

Under a plan announced in April, debt on the books of SMSFs would be added to fund values when calculating the new $1.6 million limits for tax-free super pensions.

The move was designed to stop people effectively getting around the cap by using borrowings to reduce asset values and paying the debts off over time.

The initial consultation period for the move expired on May 3 but the government has opened discussions again with the superannuation industry.

A spokesperson for acting Financial Services and Revenue Minister Mathias Cormann said: “Following stakeholder feedback, the government will consult further with stakeholders on the proposal to add the outstanding balance of a limited recourse borrowing arrangement (LRBA) to a member’s total superannuation balance measure in conjunction with consultation on the non-arm’s length income integrity measure announced in the 2017-18 budget.”

The SMSF industry has kicked back on the moves, saying they may force some investors to sell properties because they won’t be able to make extra non-concessional contributions to their fund needed for debt repayments once it has hit the $1.6 million limit.

“Some self-managed funds may not be able to use limited recourse borrowing arrangements if they will be relying on non-concessional contributions to repay some or all of the loan interest and capital because the gross value of the asset(s) will take them over the $1.6 million total superannuation balance and they will be unable to make further non-concessional contributions to service the debt,” the SMSF owners alliance said in a submission on the issue to Treasury.

The opposition has not expressed a view on the legislation, saying instead it would like to ban SMSF’s borrowing altogether.

“Labor has previously stated that we will restore the general ban on direct borrowing by superannuation funds, as recommended by the 2014 Financial Systems Inquiry, to help cool an overheated housing market partly driven by wealthy Self-Managed Super Funds,” a spokesman for Labor’s shadow Financial Services Minister Katy Gallagher said in response to questions from The New Daily. 

“This has seen an explosion in borrowing from $2.5 billion in 2012 to more than $24 billion today.” 

Stephen Anthony, chief economist for Industry Super Australia, said there was an argument for leaving out existing arrangements from the changes.

“I’d be happy to see transition arrangements put in place and allowing the restrictions to apply to arrangements from here on in,” he said.

“But if the outcome of the consultation is just to water down what I see as a useful structural reform, I’d be very disappointed.”

The industry fears that introducing the new restrictions to existing arrangements would mean some SMSF owners would be forced to sell properties held in their funds because they would not be able to make loan repayments.

The explosion of SMSF property debt has been a concern for regulators, with the Murray inquiry into the financial system in 2014 recommending SMSF borrowing be banned, warning “further growth in superannuation funds’ direct borrowing would, over time, increase risk in the financial system”.

The Reserve Bank concurred.

DomaCom test case: super-for-housing is back on the agenda

From The NewDaily.

Listed investment group DomaCom Ltd is suing the tax man to allow self-managed super fund investors to buy into properties they live in – a test case with potentially huge implications for superannuation and housing affordability.

DomaCom’s ambitions were stymied last October when the Australian Taxation Office said the company’s plans did not pass the ‘single purpose test’ for superannuation.

DomaCom uses trust structures to allow SMSF investors to buy a percentage of a property that they or their families live in. The ATO considered this creative use of trust structures to essentially allow people to gain a benefit by living in their property while holding it as a superannuation investment.

But DomaCom didn’t take that decision lying down. It moved to start an internal dispute process with the ATO. That process proved inconclusive, so now the company is asking the Federal Court to rule on the situation.

It would like the court to say that DomaCom’s structures are not in-house or related trusts for the purposes of superannuation.

To bring the case, DomaCom is financing a civil action taken by one of its clients, who has invested in an apartment built for student accommodation and would like his daughter to rent it while she completes her studies.

DomaCom CEO Arthur Naoumidis told The New Daily, “if we get the ruling in our favour then we would argue we have a precedent and we could follow it”.

However, were the courts to find in DomaCom’s favour, regulators are likely to be concerned on two counts. The purpose of superannuation could be undermined by allowing SMSF owners and their families to live in properties part-owned by their private super funds.

There would also be concern that housing affordability could be further damaged by SMSFs pouring money into residential property.

Even if that idea holds water legally, the ATO and Treasury would be unlikely to let it lie.

Helen Hodgson, associate law professor at Curtin University, told The New Daily last year that “if it was found to be technically possible I imagine fairly soon we would find someone saying the loophole should be closed”.

DomaCom is a listed investment company with lots of units and investments. But unlike other investment companies it allows people to choose a property they want to buy into and purchase through a dedicated sub-fund.

When a property is found by would-be buyers, DomaCom organises a book build where would-be investors promise to buy units at a certain price. If enough money is raised the sub-fund buys the property, essentially through crowd funding.

DomaCom has claimed it is not restricted by the sole purpose test because it ensures when people buy into a sub-fund they are legally buying into a small part of the overall DomaCom structure, rather than buying a single asset.

What DomaCom believes is that if an SMSF buys a stake in, or all of, a sub-fund, its owners can legally live in the building or rent it to their children because the SMSF would receive income from the overall revenues of the fund, not rent paid.

It would also allow children to build stakes in properties their parents bought in an SMSF through purchasing units in the sub-fund over time using their super contributions.

“The ability to use superannuation to help people into a home is clearly a topical issue in Australia and it is our belief that the DomaCom Fund can play a key role in solving this issue whilst still protecting the assets of the SMS,” Mr Naoumidis said.

Cost of ‘modest’ retirement up 33%: ASFA

Rising costs of living are impacting retired households according to new research.  The figures reveal couples aged around 65 will need to spend $59,971 a year and singles $43,665.

Significant hikes in the cost of power, health care, food and rates over the past 10 years have driven increases in the amounts needed to achieve both modest and comfortable retirements, according to the latest data from the Association of Superannuation Funds of Australia (ASFA).

It is more than a decade since the first release of the modest and comfortable ASFA Retirement Standard (RS) budgets.

Every three months since June 2006, they have tracked the rise and fall of items that comprise average household budgets. Updates reflect inflation and provide detailed budgets of what singles and couples need to support their chosen lifestyle.

Between June 2006 and March 2017, the RS budget at the modest level for a single person increased by 33 per cent, while the single comfortable budget rose by 23 per cent.

The budget for a couple at the modest level increased by 36 per cent and at the comfortable level by around 26 per cent.

ASFA CEO Dr Martin Fahy said the figures compared to an overall 28.6 per cent increase in the Consumer Price Index (CPI).

“The categories of expenditure that really impacted the budgets are not altogether surprising,” he said.

“Over the period, electricity costs increased by 124 per cent, health costs by 60 per cent, property rates and charges by 83 per cent and food costs by 24 per cent.

“Price changes for less essential items tended to be lower and in some cases prices fell.

“The price of clothing fell by a total of three per cent over the period with an eight per cent fall in the cost of communications (including telephone and mobile phone charges).

“The cost of international holidays rose by a relatively modest 16 per cent over the period.”

Over the more than 10 year period, the maximum Age Pension increased in real terms, by 70 per cent for a single person and 54 per cent for a couple, from a starting base far too close to the poverty level.

The Age Pension is adjusted by what is the greater of the increase in average wages or the CPI. During the period, average earnings rose by 43 per cent.

There also were some discretionary increases made to the rate of the Age Pension, particularly to the single rate. However, despite these various increases, the Age Pension alone still does not permit a retiree to achieve even a modest standard of living in retirement at the levels set by the ASFA RS.

The increases in the Age Pension over and above the increase in the CPI and in wages have helped contain the savings required at the time of retirement, in order to support either a modest or comfortable lifestyle.

On the other hand, the tightening of the means test has led to an increase in the amount of retirement savings needed to support a comfortable standard of living in retirement.

Other price increases of interest included: tobacco (not in RS budgets but consumed by many retirees) up by 178 per cent; wine up by only six per cent, but beer up 45 per cent; rents up 51 per cent; postal services up 45 per cent; vet fees (not in RS budgets) up 49 per cent; and, insurance costs up 72 per cent.

Dr Fahy said both budgets assume retirees own their own home outright and are relatively healthy.

“Of increasing concern is the reality of many more retirees at the mercy of the private rental market, so when you consider the increase in renting costs, it highlights the need for increasing numbers of retirees to have much greater super balances to support a reasonable retirement,” he said.

In the latest RS updates for the March quarter, there was a slight increase in the cost of living for retirees, with increases in the prices of petrol, medical and hospital services and electricity.

The ASFA RS March quarter figures indicate couples aged around 65 living a comfortable retirement need to spend $59,971 per year and singles $43,665, both up 0.3 per cent on the previous quarter.

Total budgets for older retirees increased by around 0.3 per cent at the comfortable level and 0.6 per cent at the modest level.

Over the year to the March quarter, there was a 1.8 per cent increase in the budgets, slightly lower than the 2.1 per cent increase in the All Groups CPI.

Dr Fahy said the cost of retirement over the most recent quarter only increased by a relatively small amount but many individuals would still find it difficult to achieve a comfortable standard of living in retirement.

“Over the longer term, the cumulative increase in retirement costs has been considerable,” he said.

The most significant price increases in the March quarter contributing to the increases in annual budgets were for automotive fuel (5.7 per cent), medical and hospital services (1.6 per cent) and electricity (2.5 per cent). Fluctuations in world oil prices continue to influence domestic fuel prices.

The most significant offsetting price falls were for international holiday travel and accommodation (-3.8 per cent) and fruit (-6.7 per cent).

Overall, food prices fell 0.2 per cent in the March quarter. The main contributor to the fall was fruit (-6.7 per cent), due to plentiful supplies of both year-round and summer fruit. Over the last 12 months, food prices rose by 1.8 per cent.

International holiday travel and accommodation prices fell 3.8 per cent due to the winter off-peak seasons in Europe and America.

Clothing and footwear prices fell 1.4 per cent in the quarter, reflecting discounting during the post-Christmas sales.

The price rises for both medical and hospital services and pharmaceutical products reflect the annual cycles for the Medicare Benefits Scheme and Pharmaceutical Benefits Scheme (PBS).

Insurance prices increased 0.8 per cent in the quarter. Over the last 12 months, insurance prices have increased by 6.8 per cent.

Expenditure on education is not included in the retirement budgets but some retirees paying school fees for their grandchildren would be affected by a 4.1 per cent increase in secondary education school fees following the commencement of the new school year.

Retail funds harvest 50% of all superannuation fees

From The New Daily.

Retail super funds are soaking up half of all fees in the superannuation system despite holding only 29 per cent of retirement savings, according to new research carried out by Rainmaker for Industry Super Australia.

‘Retail’ includes the big four banks, who last year alone scooped up 28 per cent of all fees, totalling $8.7 billion.

Overall, the survey found that in 2016 Australians paid $31 billion in fees on $2.2 trillion of superannuation. That amount of fees is about the same as the cost to the government of superannuation tax concessions, and more than half the $45 billion spent on income support for the elderly.

Of that $31 billion in fees, the for-profit sector (which also includes self-managed super funds) ends up with $28 billion, or 91 per cent, Rainmaker found.

That’s because while the not-for-profit sector (including industry, public sector and corporate funds) charged a total of $12.7 billion in fees, $9.9 billion of that went to private sector wealth managers to provide insurance and fund management services. The not-for-profit sector kept only $2.8 billion.

A further breakdown of super costs shows how retail funds harvest more:

  • Retail super funds, with 29 per cent of funds under management (FUM) and an estimated 45 per cent of members, received 50 per cent ($15 billion) of all fees
  • Not-for-profit funds (industry, public sector and corporate) accounted for 42 per cent of FUM, 45 per cent of members and collected 42 per cent (roughly $13 billion) of fees
  • SMSFs with 30 per cent of FUM and 10 per cent of members received 7 per cent of all fees

Within the for-profit sector there is further inequality. Rainmaker estimates that Australia’s five major banking groups and AMP receive 40 per cent of total super fees, or $12.3 billion, while the big four banks alone account for $8.7 billion in fees.

David Whiteley, CEO of Industry Super Australia, told The New Daily that “the banks have been getting significant funds from superannuation yet they have been underperforming the not-for-profit funds”.

“The government should be evaluating whether they think its appropriate for the banks to be generating nearly $9 billion a year from fees on super.

“The government and regulator need to find out if the bank-owned super funds are eroding workers’ super savings by generating profits for the parent bank.”

Alex Dunnin, research director at Rainmaker, said there had been some pressure on for-profit funds to reduce costs in recent years but they still have high costs. “There’s nothing necessarily wrong with being in high-fee products but you need to make sure it’s worth it.”

Source: Rainmaker

As the above chart shows, retail funds have significantly underperformed not-for-profit funds over the last 10 years.

“The bank-owned super funds delivered returns of 2 per cent less per annum when compared to industry super funds over 10 years. For an average income earner, this under-performance, if continued, could cost $200,000 in retirement savings over their lifetime,” Mr Whiteley said in a statement.

Mr Dunnin said the research showed retail fund members spend about $5.4 billion on advisors because much of their business is advisor driven. Advisory fees include entry advice fees, grandfathered ongoing trail commissions for pre 2013 business and fee for service portfolio structure and investment advice fees.

Industry funds do provide some advice but its total is very small and not captured by the research, he said.

Total fees paid by superannuation fund members across Australia decreased marginally during 2015-16 from 1.19 per cent to 1.18 per cent.

The Financial Services Council declined a request for comment.

*The New Daily is owned by a group of industry super funds

We Paid $31 billion in Super Fund Fees Last Year

From Business Insider.

Australians paid $31 billion as fees to fund managers to handle their superannuation funds last year, according to a study by Rainmaker.

These numbers put it in perspective.

  • There were 28 million pension or superannuation accounts in the country, according to the The Association of Superannuation Funds of Australia Limited
  • A total of 12.06 million Australians were employed as of March out a population of 24.5 million, according to government statistics
  • Australian retirement assets totaled $2.3 trillion, the fourth largest such savings pool in the world

This works out to a fee of $1,107 per pension account a year, or $2,570 for every employed Australian. That compares with the average weekly total earnings of $1,164.60.

The following chart from Rainmaker shows the distribution of fees.

Rainmaker/ Supplied

The survey also underscores that the Australian savings pool isn’t gaining from the economies of scale as one would expect.

While total retirement assets soared 11% in the year to March 31, total fees paid by members across Australia stood at 1.18% last year from 1.19%, the previous year.

As the following table points out, the drop in fees has slowed to a trickle. From 1.33% in 2010, it fell to 1.19% three years earlier thanks to reforms by the government to institute a low-fee passive investing product. Since then the numbers have stagnated while assets have soared.

Rainmaker/ Supplied

Fees are coming down predominantly because of falls in administration fees, which are often paid out when an account is set up, rather than falls in investment fees, Rainmaker said.

The nation’s retirement assets are projected to reach $7.6 trillion by 2033, according to Deloitte.

The estimate is based on the guaranteed pension contribution climbing to 12% from 9.5% now and investment growth, Deloitte says.

Australia introduced a compulsory retirement savings plan in 1992 to address the burden an ageing population would exert on the pension system and public finances.

While that has boosted assets, the focus is shifting to fees in a low yield environment. There are nine different type of fees the funds charge including exit and activity-based fees, according to the Australian Securities & Investments Commission.

A 1% difference in fees now could be up to a 20% difference in 30 years, the regulator says in its website.

Retirement Income Stream Review Outcomes

In its superannuation policy for the 2013 election, the Government stated that it would review both the minimum withdrawal amounts for account-based pensions and the regulatory barriers currently restricting ‘the availability of relevant and appropriate income stream products in the Australian market’. The Treasury has now released the outcomes of the review.

The paper says the current annual minimum drawdown requirements are consistent with the objective of the superannuation system to provide income in retirement and should be maintained.

An additional set of income stream rules should be developed which would allow lifetime products to qualify for the earnings tax exemption provided they meet a declining capital access schedule.

In regard to the existing minimum drawdown rules:

1. The current annual minimum drawdown requirements are consistent with the objective of the superannuation system to provide income in retirement and should be maintained.
2. The Australian Government Actuary should be asked to undertake a review of the annual minimum drawdown rates every five years and advise the Government to ensure that they remain appropriate in light of any increases in life expectancy.
3. Any other changes to the minimum drawdown amounts should only be considered in the event of significant economic shocks and based on further advice from the Australian Government Actuary.

In regard to the development of other annuity-style retirement income stream products:

4. An additional set of income stream rules should be developed which would allow lifetime products to qualify for the earnings tax exemption provided they meet a declining capital access schedule.
5. The alternative product rules should be designed to accommodate purchase via multiple premiums but additions to existing income stream products should continue to be prohibited.
6. Self-Managed Superannuation Funds (SMSFs) and small Australian Prudential Regulation Authority (APRA) funds should not be eligible to offer products in the new category.
7. A coordinated process should be implemented to streamline administrative dealings with multiple government agencies.

Minimum drawdowns in practice

Chart 1 (below) illustrates a drawdown scenario for male and female retirees commencing an account-based pension with a balance of $200,000 at age 60 and drawing down at the minimum payment amounts with investment returns of 6 per cent per annum. The chart shows the account balance at various ages and the income drawn down each year in both nominal and net present value (NPV) terms.

An account-based pension drawn down only at the minimum rates can be expected to last beyond average life expectancy, although the NPV of the annual income will generally gradually diminish. In the below example, the net present value of the account balance at life expectancy is around 25 per cent of the initial opening account balance. The net present value of income from the pension declines steadily over time, but ‘ratcheting-up’ occurs when the regulated percentages increase, resulting in a somewhat variable income stream in nominal terms.

Chart 1

Note: The analysis assumes an average nominal investment return of 6 per cent. This is also the discount rate for net present value.

Proposed capital access schedule

Under the proposed alternative income stream rules, products would qualify for the earnings tax exemption provided the maximum amount that could be returned to the product holder if they withdraw from the product at a later date declines in a straight line from commencement to life expectancy.

In addition, products would be able to offer a death benefit of up to 100 per cent of the nominal purchase price for half of this period, with the maximum death benefit limited to the capital access schedule thereafter.

For example, male life expectancy at age 65 is approximately 19 years.

Under this proposal, a product sold to a 65 year old male could offer a declining commutation value such that the amount of the purchase price that could be returned on withdrawal would be zero by age 84, but a death benefit of 100 per cent could be offered for around 10 years (to age 75). Income payments would continue for life (see Chart 2).

In the case of deferred products, the schedule would commence at the same time as the product becomes eligible for the earnings tax exemption. For example, where an individual retires at age 65 and buys a deferred annuity that pays an income stream from age 80, the earnings tax exemption and the depreciation schedule would both commence from age 65, even though income payments would not commence until age 80.

Chart 2