Retirement income streams
Super funds can pay benefits to a member as a super income stream if the member has met one of the condition of release. A super income stream (also known as a super pension or annuity) is a series of periodic payments to a member.
An income stream is either:
- account-based income streams, or
- non-account based income streams
Account-based income streams pace the member in charge of their retirement account in much the same way that most members are in charge of their superannuation accumulation account during their working lives. Account-based income streams are the most popular type of income stream for Australian who convert their accumulated superannuation into income stream. Reflecting this, account based streams can only be purchased with superannuation monies.
Non-account based income streams involve contracting with either a superannuation fund or a life office to provide an income stream. They are generally for a fixed term or their lifetime:
- Fixed-term - paid over a specific term at a rate that is fixed according to their life expectancy and the amount of capital deposited into it at commencement
- Lifetime - these income streams last as long as the member. As with the fixed term. the income level is pre-agreed. However, unlike other income streams, the income from lifetime income streams is guaranteed for their lifetime - no matter what happens to the member or the investment markets.
A member doesn't have to choose one or the other because they can both work together: non-account based income streams may be used to provide a basic income needs (ie to reduce uncertainty) and a member can combine this with account-based pension for their discretionary income needs or to produce higher potential returns to help manage inflation risk. Account-based pensions are however used most of the time to fund all or most of a retiree needs.
But there's a new breed of account-based pensions emerging that guarantee to pay a certain amount of income for life, even after the account balance reduces to nil. These are often generically referred to as longevity income streams or deferred income streams, but they can operate under various other marketing names.
What are the standards for income streams
The following standards apply to both account-based and non-account based income streams:
- a minimum amount is paid each year and payments occur at least annually - regulations have been amended to apply a 50% reduction to the standard minimum pension factors for an account-based pension in 2019/20 and 2020/21 to assist people through the COVID-19 crisis.
- there is no maximum annual payment amount except for transition to retirement income streams
- an income stream can be commuted to a lump sum only in certain circumstances
- the capital supporting the income stream cannot be added to by way of contribution or rollover once the income stream has started
- an account-based income stream cannot have a residual capital value on termination, but a non-account based income stream may have a residual capital value
- an income stream cannot be paid to a non-dependent beneficiary after the death of a member.
If the following standards are not met in an income year, the super income stream ceases for income tax purposes and the ATO will view the fund as not paying an income stream at any time during the year.
Incomes that started before 1 July 2007 and complied with the rules applicable at the time are deemed to satisfy the new requirements and may continue to be paid under the former rules.
This technical resource is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation, needs or objectives. Before making a recommendation based on this material, you should consider its appropriateness based on the client's objectives, financial situation and needs. Rainmaker Group is not a registered tax agent under the Tax Agent Services Act 2009. Your client should refer to a registered tax agent before relying on information published herein that may impact their tax obligations, liabilities or entitlements.
Last modified: Wednesday, September 30, 2020