FOUR new Government measures proposed to address Age Pension / Superannuation / Retirement due to longer life expectancies.
One of the focuses of these changes is helping retirees prepare financially for a longer and more secure life. It is in response to increasing life expectancies for Age Pension / Superannuation / Retirement. As a result, the 2018-19 Budget introduced a ‘More Choices for a Longer Life Package’.
Age Pension / Superannuation / Retirement & longer life expectancies.
The Government recently developed four measures:
1. firstly, allowing more income to be exempt under the Pension Work Bonus.
2. a work test exemption for retirees aged 65 to 74 with a total superannuation balance under $300,000.
3. expanding the Pension Loans Scheme eligibility to anyone Age Pension age and over, and increasing the maximum ‘top-up’ amount.
4. most importantly, strengthening retirement income choices by introducing a retirement income framework (RIF).
Want to know more or explore the opportunity in strengthening retirement income choices. Contact us here.
Strengthening Age Pension / Superannuation / Retirement income choices
- introducing an alternative superannuation income stream definition based on a new capital access schedule effective 1 July 2017.
- proposing amended social security assessment for these products if purchased on or after 1 July 2019. With grandfathering applied to income streams purchased prior to said date.
The first step involves the introduction of a retirement income covenant.
Retirement income framework
Tax treatment. (Capital Access Schedule)
Social security means test treatment.
Retirement income covenant.
Simplified, standardised disclosure for retirement products.
Retirement income projections.
Removing the barriers to Retirement Income – lifetime products Framework.
Retirement income covenant.
The Government proposes to legislate this by 1 July 2019 with delayed commencement till 1 July 2020.
The covenant is underpinned two key principles:
1. Therefore will assist in meeting retirement income objectives by developing a ‘suitable’ retirement income strategy.
2. Provide guidance (financial advice) to assist members in making the most appropriate choice, given their needs and preferences.
Age Pension / Superannuation / Retirement considerations.
The following factors need to be considered when designing a retirement income strategy.
• maximising income for life – encompassing the Age Pension, current Superannuation throughout Retirement.
• the potential life spans and the costs and benefits as a whole.
• managing risks that affect the stability of income, including inflation.
• providing members with access to capital.
• expected eligibility for the Age Pension.
• whether and how cognitive decline may affect outcomes.
Above all, improving retiree outcomes by introducing a retirement income covenant is paramount. Self-managed superannuation funds will also be required to develop a retirement income strategy.
As a result and in line with the Government focus on helping retirees prepare financially for a longer and more secure life, we as your advisers can help improve your retirement outcomes by implementing a longer-term outcomes-based, income-layering.
The benefit of income layering;
- the client’s essential expenses are covered through the Age Pension and a lifetime annuity in the first two layers. These two layers would provide broadly constant income for life. The added income layer could be an account-based pension which provides flexible access to capital where desired.
- Income layering Income to pay for desirables.
- Income to pay for essentials.
- Account-based pension.
- Lifetime annuity.
- Age Pension Peak spending.
Example; Age Pension / Superannuation / Retirement
Richard and Leonie are a homeowner couple, 66 years old and have $300,000 each in superannuation. Have a 50/50 risk profile. They have $20,000 on home contents. $50,000 in a cash reserve and currently receiving $12,992 per annum Age Pension.
Hence, we review their retirement income options, they speak to us as their adviser. They explain their primary goal may be to generate $42,000 per annum income to pay for essentials, no matter how long they live.
However, they prefer a more comfortable retirement. Perhaps $60,000 per annum would be enough to achieve that. We may recommend they invest their superannuation into an income stream using an income layering approach.
- A secure investment that can provide a series of regular payments for the rest of their lives. When combined with Age Pension, these two layers of income help meet their essentials. Even if they spend the remaining balance of their savings in the future.
- Account-based pension.They can choose from a range of investments and select the income they draw. Subject to the Government’s minimum payment requirements. The account-based pension may be invested in a mix of 62% growth and 38% defensive assets. This can maintain their overall 50/50 risk profile as the Lifetime annuity forms part of their defensive assets.
Perhaps with our recommendations, Richard and Leonie will have income from various sources to meet different expenses.
The secure income from the Age Pension and the Lifetime annuity provides them with regular income. This can help pay for their essential living expenses during their lifetime. Payments from the account-based pension help them to achieve their desired lifestyle until the capital runs out.
Projected cash flow for blended account-based and lifetime income portfolio.
Finally, after speaking to us as their adviser, Richard and Leonie’s $600,000 superannuation balance may be invested so that during the first year of retirement.
• $60,000 each in Lifetime annuity gives them $6,3532 in total.
• $240,000 each in account-based pensions gives them $38,655 in total.
• they receive $12,992 from the Age Pension.
Therefore, total income including income earned on the money they have in the bank, during the first year of their retirement is $60,000. First year’s income from various sources.
What are your options?
Contact us here with your ‘longer life’ Age Pension / Superannuation / Retirement Enquiry