Family and Community Services and Veterans' Affairs Legislation Amendment (Income Streams) Bill 2004

June 2004

Parliament of the Commonwealth of Australia 2004

ISBN 0 642 71417 7

Table of Contents

Membership of the Committee

Report

• The Inquiry
• The Bill
• Issues
• Recommendation

Additional Comments from Labour Senators

Appendix 1 Submissions received by the Committee
Appendix 2 Public Hearing

Senate Community Affairs Legislation Committee Secretariat

Mr Elton Humphery Secretary
Ms Christine McDonald Principal Research Officer
Ms Leonie Peake Research Officer
Ms Ingrid Zappe Executive Assistant

The Senate
Parliament House
Canberra ACT 2600

Phone: 02 6277 3515
Fax: 02 6277 5829
E-mail: community.affairs.sen@aph.gov.au
Internet: https://www.aph.gov.au/senate_ca

Membership of the Committee

Members

Senator Sue Knowles, Chairman	LP, Western Australia
Senator Brian Greig, Deputy Chairman	AD, Western Australia
Senator Guy Barnett	LP, Tasmania
Senator Kay Denman	ALP, Tasmania
Senator Gary Humphries	LP, Australian Capital Territory
Senator Jan McLucas	ALP, Queensland

Substitute member

Senator Nick Sherry to replace Senator Denman for the committee's inquiry into the Family and Community Services and Veterans' Affairs Legislation Amendment (Income Streams) Bill 2004

ALP, Tasmania

Family and communtiy services and veterans' affairs legislation amendment (Income Strams) Bill 2004

The Inquiry

99.1 The Family and Community Services and Veterans' Affairs Legislation Amendment (Income Streams) Bill 2004 (the Bill) was introduced into the House of Representatives on 26 May 2004 and in the Senate on 15 June 2004. On 16 June 2004, the Senate, on the recommendation of the Selection of Bills Committee (Report No. 8 of 2004), referred the Bill to the Committee for report.

99.2 The Committee considered the Bill at a public hearing on 18 June 2004. Details of the public hearing are referred to in Appendix 2. The Committee received six submissions relating to the Bill and these are listed at Appendix 1. The submissions and Hansard transcript of evidence may be accessed through the Committees website at https://www.aph.gov.au/senate_ca

The Bill

99.3 The purpose of the Bill is to change the social security and veterans' affairs means test assessment for certain income streams.

99.4 Currently, income streams that meet certain criteria are 'asset-test exempt' for the purposes of the means test for social security and veterans' affairs payments. This means that the asset value of the income stream is not taken into account when determining a person's eligibility for a social security payment. The proposed legislation seeks to change entitlements means test assessments of income streams to:

• extend asset-test exempt status for a new product, 'market-linked income streams' from 20 September 2004. This product will offer market returns but the purchaser will not be able to withdraw his or her capital before the term of the product has been ended (ie it is non-commutable); and

• change the social security assets test exemption from 100 per cent to 50 per cent for non-commutable income streams that are purchased from 20 September 2004 and meet the requirements for exemption from the assets test.[1]

99.5 The Bill also contains provisions to align the characteristics of life expectancy income stream products with those of the new market-linked income stream products. This will ensure that the products are treated in a consistent manner under the means test.

99.6 Under present arrangements, life expectancy income streams only retain assets test exempt status on reversion to a reversionary beneficiary where the remaining term of the income stream matches the beneficiary's life expectancy at the time of death. As a consequence, for most life expectancy income streams, assets test exempt status is lost when the income stream reverts. Under the proposed legislation individuals, who purchase life expectancy and market-linked income streams on or after 20 September 2004, will have 'greater confidence that the income stream will retain its asset test exempt status on reversion to a partner'.[2]

99.7 The Bill also proposes to extend the guarantee period for asset-test exempt lifetime income streams. The current means test rules stipulate that an asset test exempt lifetime income stream may only be commuted if the primary beneficiary dies within a 10-year period of purchasing the income stream. The Bill will extend this period to allow a lifetime income stream to be commuted provided that the primary beneficiary dies within a period equal to his or her expectancy or within 20 years of purchasing the income stream, whichever is the lesser.

99.8 Table 1.1 provided by the Department of Family and Community Services gives a pictorial representation of the different categories of income streams products.

Issues

Market-linked income streams

99.9 Market-linked income streams will offer market returns but the purchaser will not be able to withdraw his or her capital before the term of the product has ended (that is, it is non-commutable). Presently, consumers can only select insurance-based income streams which offer a guaranteed income but at generally low return.[3] According to evidence provided, the availability of many other products will be a consequence of this legislation.

99.10 The Investment and Financial Services Association (IFSA) stated that the new product would enable retirees to 'invest in a balanced portfolio of investments and that will improve both the amount and the quality of their returns over their retirement'. In addition, because market-linked income streams do not involve any income guarantees, a broader range of funds, both in the for-profit sector and elsewhere, will be able to offer products.[4]

Table 1.1

Source: Submission No.1 (Department of Family and Community Services).

99.11 IFSA also noted that the changes to life expectancy provisions will result in 'a significant lengthening, we believe, in the terms that people can choose and, importantly, a choice in the length of term between life expectancy and the life expectancy of somebody five years younger than you'. There are also changes to the provisions concerning who can purchase a market-linked income stream with either a couple or an individual now being able to purchase the product.[5]

99.12 IFSA concluded that the changes will result in 'quite significant competition amongst product providers'. In addition a strong demand from consumers was expected as there is a need for retirees to invest in growth assets to fund their retirement.[6] The market-linked income streams 'will be a better product by the measures that consumers bring to the marketplace than the preceding offers'.[7]

99.13 The Securities Institute also noted that market-linked income streams provide better returns, higher levels of income over time for retirees and allow retirees to control their capital.[8]

99.14 The Department of Family and Community Services (FaCS) noted that the proposed changes to extend assets test exempt status to the new 'market-linked income streams' will increase competition in the income streams market and provide retirees with more choice and flexibility by making available a wider range of products that best meets their retirement needs.[9]

99.15 The Department stated that features which will allow more flexibility include:

• life expectancy provisions which allow for a choice of the individual's life expectancy or life expectancy at an age five years younger than that persons current age. Individuals who are members of a couple will also have the choice of selecting the term based on their spouses life expectancy and life expectancy of that partner at an age five years younger;

• allowing retention of the assets test exemption on reversion to a spouse, if the primary beneficiary dies, provides couples with greater choice in purchasing income streams that provide income for the greater part of both partners' lives.

• payments being made to the recipient annually and are based on payment factors contained in the Superannuation Industry (Supervision) Regulations;

• the product will be non-commutable except in limited circumstances, such as hardship or divorce; and

• purchase of market-linked income stream products by an individual from any age and obtain the 50 per cent asset test concession from purchase.[10]

Changing the asset test exemption to 50 per cent

99.16 The Association of Superannuation Funds of Australia (ASFA) stated that it supported the measures 'particularly the reduction from 100 per cent to 50 per cent, if they better target the public pension'.[11]

99.17 FaCS also stated that the change in the assets test exemption from 100 per cent to 50 per cent for asset test exempt income streams purchases after 20 September 2004 is aimed at ensuring that social security payments are paid to those who need it most. FaCS noted that even after the change, it will be possible for home owner couples to invest $900,000 in a complying income stream and still receive some age pension if they have no other assessable assets. FaCS concluded that, while providing some concessions:

These changes will make the retirement income system fairer by better targeting the age pension to those in need.[12]

Recommendation

99.18 The Committee reports to the Senate that it has considered the Family and Community Services and Veterans' Affairs Legislation Amendment (Income Streams) Bill 2004 and recommends that the Bill proceed.

Senator Sue Knowles

Chairman

June 2004

Family and Community Services and Veterans' Affairs Legislation Amendment (Income Streams) Bill 2004

Additional Comments from Labor Senators

The tightening of the assets test, which reduces the level of tax exemption for certain complying pensions from 100% down to 50%, will have a significant impact over time on those entitled to claim the age pension.

It will lead over time to either the loss, or a reduction, in the level of the age pension that many low and middle income Australians would otherwise have been entitled to on retirement and not just millionaires as was inferred by the Department, IFSA and ASFA.

The number of persons estimated to be affected in the first year is 19,000 to 20,000. This number will continue to grow at a similar rate in the following years as reflected in the projected savings.

Year	2005/06	2006/07	2007/08
Amount	$28 million	$60million	$97 million

In addition, the effect of superannuation balances, which will increase significantly as a result of compulsory superannuation which was introduced in 1987, and are included in the means test, means that there will be a significant average increase in assets for many individuals in futures years.

Taking into account the fact that the asset test for single persons cuts in at approximately $150,000, increasing numbers of low and middle income Australians will be caught by this measure.

Senator Jan McLucas (ALP, Queensland)

Senator Nick Sherry (ALP, Tasmania)

Appendix 1 - Submissions received by the Committee

1	Department of Family and Community Services
2	Industry Fund Services Pty Ltd (IFS)
3	Investment & Financial Services Association Ltd (IFSA)
4	Small Independent Superannuation Funds Association Ltd (SISFA)
5	Securities Institute
6	The Association of Superannuation Funds of Australia Limited (ASFA)

Appendix 2 - Public Hearing

A public hearing was held on the Bill on 18 June 2004 in House of Representatives Committee Room 2R1, Parliament House, Canberra.

Committee Members in attendance

Senator Knowles
Senator Humphries
Senator McLucas
Senator Sherry

Witnesses

Investment & Financial Services Association Limited (IFSA)

Mr Bill Stanhope, Senior Policy Manager
Ms Nicolette Rubinsztein, General Manager, Colonial First State Investments Ltd

Association of Superannuation Funds Australia (ASFA)

Dr Michaela Anderson, Director, Policy
Mr Robert Hodge, Senior Policy Adviser

Department of Family and Community Services

Mr Alex Dolan, Assistant Secretary, Seniors and Means Test Branch
Mr Sam Cavalli, Director, Seniors and Means Test Branch

Department of the Treasury

Mr Patrick Boneham, Senior Adviser, Superannuation, Retirement and Savings Division