Superannuation lifetime income streams
You can choose to accept part of your superannuation money in the form of a lifetime income stream.
Lifetime income streams are a series of regular payments that keep coming as long as you are alive. A lifetime income stream only stops when you finally stop breathing.
Lifetime income streams are called lifetime annuities in the actuarial textbook and old novels.
Long ago rich people bought annuities for their elderly aunts to ensure a reliable income without giving access to the family wealth.
The basic annuity contract provides for the purchaser to pay a large lump sum to the ‘life insurer’. In exchange, the life insurer will pay a set amount to the annuitant every year for the remainder of their life.
In setting the annuity contract terms, the life insurer assumed that only really healthy people who expected to live to be centenarians would buy annuities.
Superannuation lifetime income streams
Superannuation lifetime income streams are a means of converting accumulated superannuation benefits into a steady stream of regular income payments.
Buying a superannuation lifetime income stream helps Australian retirees to use their superannuation wealth gradually over their lifetimes.
New Centrelink rules allow some Age Pension means testing concessions for superannuation lifetime income streams purchased from July 2019 onward.
You are allowed to start your regular payments from your superannuation lifetime income stream immediately.
Australian life insurers are ready to sell you an immediate annuity contract as a lifetime income stream that meets the Centrelink conditions.
Alternatively, you could ask for your regular payments from your lifetime income stream to start later. Deferred annuity contracts that could meet all of the Centrelink lifetime income stream requirements are also available from Australian life insurers.
Deferred superannuation lifetime income stream
Younger retirees might want to manage their own wealth. Access to capital to take overseas trips, help their children into housing and generally enjoy retirement life is important. But maybe there is that nagging worry about running out of money.
A deferred superannuation lifetime income stream allows you to set aside some wealth now so that you do not outlive your money.
Consider Bob who retired from full time work at age sixty.
Bob used his superannuation money to establish an allocated pension account. The superannuation fund credits Bob’s allocate pension account with investment earnings and debits its administration fees and the ‘income’ payments that Bob draws out.
For the next ten years Bob worked part time to keep himself active. Bob found that his earnings from work plus the minimum drawdowns from his allocated pension account was enough to cover his living costs.
As Bob slows down physically he reduces his working hours and his earned income. Bob then needs to take more out of his allocated pension account to cover his basic living costs. But Bob worries that he might run out of money when he is old.
Bob then realises that he is now eligible for a small part Age Pension. The amount of his Age Pension could increase as his superannuation account shrinks. But Bob is still worried that he is spending his savings too fast and might have nothing left when he is really old.
Bob decides to use part of his savings to buy a superannuation lifetime annuity to start when he is eighty. By putting aside some savings now Bob will be assured that he will have a little more than the Age Pension when he is elderly. So Bob uses some of his superannuation money to buy a lifetime income stream.
Age Pension impact of buying the lifetime income stream using superannuation money.
Bob now aged 70 years takes $100,000 out of his superannuation allocated pension account and buys a lifetime income stream.
Bob chooses to have the income stream payments start when he reaches age eighty years.
Bob’s contract is for monthly payments of $900 for the remainder of his life.
Centrelink assessment from the purchase date until the deferred superannuation lifetime income stream payments start
Centrelink could exempt the $100,000 lifetime income stream purchase price from both the Age Pension Asset Test and the Income Test until Bob starts to receive payments from his lifetime income stream.
During this ‘deferment period’ Centrelink do not count the deferred superannuation lifetime income stream contract for the Age Pension Income Test. This seems fair as Bob gets no income from his deferred superannuation lifetime income stream while it is being deferred.
Age Pension Asset Test assessment once the superannuation lifetime income stream payments start
Then for the five year period from when Bob starts his superannuation lifetime income stream, Centrelink would count a minimum of 60% of the purchase price in the Asset Test for Bob’s Age Pension.
The minimum value of Bob’s lifetime income stream for the Age Pension Asset Test could drop to 30% of the purchase price when Bob satisfies two conditions.
The first condition is that Bob must have been receiving regular payments from his lifetime income stream for at least five years.
The second condition is that has attained age eighty four years.
As Bob only started receiving his lifetime income payments at age 80 years he will have reached age 85 years before he has collected five years of payments.
Thus Bob will satisfy both conditions for the lower Asset Test value when he attains age 85 years.
Age Pension Income Test assessment of superannuation lifetime income stream payments
Once Bob starts receiving his monthly payments from his lifetime income stream, Centrelink will count 60% of the payment amount for the Income Test.
Thus if Bob is getting $900 per month then $540 per month will be counted in the Income Test for his Age Pension.
Potential costs of buying a lifetime income stream using superannuation money.
A lifetime income stream is a form of ‘annuity’ which is a ‘financial product’ that can only be sold by an Australian licenced life insurance company.
The life insurer collects lump sum payments from the annuity buyers and promises to pay the regular annuity amounts regularly as long as the annuity buyer is alive. Some annuity contracts also require part of the purchase price to be repaid if the buyer dies early.
The life insurance company must hold enough money in ‘reserve’ to always be able make the annuity payments even if the annuity buyers live longer than expected.
The annuity buyers contribute to the costs of holding the extra reserve money.
Setting the terms of the annuity ‘deal’ and then undertaking the long term administration of annuities is complex.
As well as investing the money paid by the annuity buyers and arranging for their regular annuity payments, the life insurer must also report to the Commonwealth regulator. The life insurer must show the Commonwealth regulator that the money it holds would be more than enough to pay all of its policyholders including all of the annuities.
The annuity buyers pay the costs of setting up and administering their annuity payments.
All of the life insurer’s costs for an annuity are reflected in the annuity purchase ‘deal’. You cannot see how much the life insurer is charging for each aspect of administration, investment and provision of the guarantee of your payments.
The annuity deal that Bob could be offered might just be
- Payments for $900 per month for the remainder of your life starting from when you attain age 80 years at a price of $100,000 paid at age 70 years.
- Your purchase price will be refunded in full if you die before the annuity payments start. A lower proportion of your purchase price could be refunded if you die before your regular annuity instalments had been paid for five years.
- There would be no refund of any part of your purchase price if your regular annuity payments had been paid for five years.
- You cannot get a refund of your purchase price during your lifetime once your ‘14 day free-look period’ ends
If you know exactly what you want you could buy a lifetime income stream directly from a life insurance company.
Most retirees would need help to choose an appropriate lifetime income stream.
You would expect to pay a licenced financial adviser a significant amount to firstly, demonstrate that a lifetime income stream was a suitable investment for you and secondly find and then help you actually buy, the right lifetime income stream for your circumstances.
Be aware of the restrictions on lifetime income streams.
Longevity risks
Firstly you need to be aware that you might not live long enough to get back all of the money that you paid for your lifetime income stream.
A lifetime income stream is a form of life insurance; insuring against the risk that you live too long. Like all insurance you are pooling your risk.
Thus the ‘lifetime’ aspect of your lifetime income stream is only possible if someone else is willing to put in the money to pay your monthly instalments when your own purchase price has been used up totally. This longevity risk, that is, the risk that you live too long, is shared among a large group of lifetime income stream purchasers.
Whilst you might outlive your contribution to the annuity pool another lifetime income stream buyer might die quite early and forfeit much of his contribution to the annuity pool. We cannot all take out more than we put into the annuity pool.
Even after allowing for some partial refunds, buyers of lifetime income streams who die early do not get back the full amount of their purchase price.
Superannuation lifetime income stream are for life – Restrictions on surrenders and cancellations
Secondly, you cannot change your mind and get a full refund of your lifetime income stream purchase price.
You do have a ‘14 day free-look period’ to read your lifetime income stream policy document and check that this lifetime income stream is right for you.
But you cannot change your mind later for any reason and get a full refund.
Your deferred superannuation lifetime income stream contract might allow for you to surrender, that is, break the contract, during the deferment period. The amount of any surrender value you could get would take account of the costs incurred by the life insurer and the investment break costs for selling out of your investments early.
Once your superannuation lifetime income stream payments start then you are committed for your lifetime.
This means that you cannot cancel your lifetime income stream contract if you discover that you have a life shortening illness. Sadly your lifetime income stream might be the one that pays only the minimum benefit.
We cannot all live longer than the average life expectancy.
A guaranteed minimum payment could be included in your lifetime income stream contract.
You could take a lower monthly payment on the condition that your lifetime income stream would be paid for at least, say, seven years. If you died before you had been paid for this seven year guarantee period the outstanding payment could be paid to your estate.
Other forms of guarantee payment periods or minimum death benefits are possible.
My superannuation lifetime income stream continuing for my surviving partner
Thirdly, think carefully before you choose to have your lifetime income stream to be paid to your spouse after your death.
Your lifetime income stream could be payable to yourself throughout your lifetime and then continue to be paid as long as your ‘reversionary beneficiary’ is alive.
You may nominate your spouse or domestic partner as your ‘reversionary beneficiary’.
The monthly payments are lower under a lifetime income stream that is payable as long as one of the two people named in the contract is alive rather than just for the lifetime of one named person.
The amount of the regular payments specified in your lifetime income stream contract will reflect the age of your ‘reversionary beneficiary’ as well as your own age. Therefore your ‘reversionary beneficiary’ must be named in your lifetime income stream document.
If you change your personal circumstances at Centrelink, you cannot change the terms of your lifetime income stream. This means that if your spouse or domestic partner, at the time you started your lifetime income stream dies, you cannot cancel or switch the reversionary beneficiary part of your lifetime income stream to your new partner.
Advising Centrelink of your superannuation lifetime income stream
Centrelink have a special form for collecting the deatils of your superannuation lifetime income stream .
The life office that provides your superannuation lifetime income stream must complete the Centrelink form for you when the contract is issued.
An updated form might be needed when your superannuation lifetime income stream payments actually begin.
Help to understand how your situation fits in the Age Pension system.
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Disclaimer. These Insights are a general over view based on our understanding of the Centrelink and DVA Pension arrangements. Individual entitlements to Centrelink and DVA benefits are determined based on your actual situation as documented to Centrelink or DVA.
The information contained in this website is of a general nature only and does not constitute “financial advice”.
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