Budgeting for lifelong income

The long-awaited nod for alternative income streams for retirees has been welcomed by policy experts who believe it will bring comfort to pensioners worried they will outlive their savings.

Centre for Independent Studies (CIS) research chief Simon Cowan said the Federal Budget’s flagging that superannuation funds must start rolling out Comprehensive Income Products for Retirement (CIPRS) was “a good move”.

CIPRS are like annuities where a retiree buys a financial product that will guarantee an income stream for life. They were first recommended by David Murray’s Financial System Inquiry in late 2014.

Until now, however, annuities have not received the most appropriate treatment under Age Pension tests, Mr Cowan told YourLifeChoices.

“Under current pension rules, annuities are disadvantaged compared with other types of income streams and assets,” he said.

“The Government wants retirees to take up other products that will address the risk of longevity and so the new CIPR regime will make these products more attractive.”

As early as July 2019, Age Pension means testing rules will be tweaked to treat lifetime income streams more favourably.

While there is expected to be a wider range of annuity-style products to suit the varying requirements of pensioners, taking them up will not be mandatory at this stage.

Mr Cowan said that there were those who argued “forcing people onto these products had a benefit for the Government of reducing reliance on the pension”.

“However, that could have unforeseen consequences and would not be in the best interests of retirees who did not have a large super balance.

“There is an element of concern that on retiring, some people will take a large lump sum and spend it, knowing that they can go on to receive an Age Pension.”

Mr Cowan said while it was reasonable to assume that a CIPR regime would eventually wean Australian retirees off welfare, currently the products would be more about giving pensioners greater flexibility and better outcomes.

“A lot of people underestimate how long they will live. CIPR will be about ensuring that they have an income for the duration of their life.”

Investment experts at Cuffelinks explained the new Age Pension means testing rule that will take effect next year: “A fixed 60 per cent of all pooled lifetime product payments will be assessed as income for Age Pension eligibility, and 60 per cent of the purchase price of the product will be assessed as assets. These apply until the age of 84 (or a minimum of five years), and then 30 per cent for the rest of the person’s life.”

While the Government is yet to detail the new regime, Mr Cowan said the aim of the revamped means test was to treat annuity-style products as income rather than capital. Annuities and other income products bought before 1 July 2019 will be grandfathered.

A position paper on CIPR for public discussion will be released soon.

Are you likely to buy a financial product that will guarantee an income for the rest of your life?

Related articles:
Understanding annuities
Did the Budget deliver?
What to do with your funds

Written by Olga Galacho

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