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Comprehensive retirement product policies vital

The federal budget’s removal of tax barriers for some retirement income products is only one piece of the puzzle and further measures are required to create greater flexibility, particularly for SMSFs.

During the delivery of the federal budget on 3 May, the government announced plans to remove the tax barriers for the development of some new retirement income products by extending the tax exemption on earnings in the retirement phase to products such as deferred lifetime annuities.

“This will be good news for retirees generally as it will broaden, hopefully, the range of retirement income stream products in the market,” Crystal Wealth Partners executive director Tim Wedd told selfmanagedsuper.

“The review of retirement income streams was also released by Treasury post-budget, which provides some insight into this measure as it may be developed.

“Essentially, the measures target lifetime products that can involve immediate and/or deferral of income payments within the product design, provided they follow a set ‘capital depletion’ framework in a straight line based on life expectancy from time of purchase.”

Wedd said that was where he expected the proposals would start, with pooled lifetime risk-based products to address longevity.

“But removing the tax barriers is only one part of creating more flexibility,” he explained.

“There is much detail to be worked through, including the social security assessment framework.

“Encouragingly, the ideas canvass the ability to purchase through multiple premiums which hopefully extends to buying such deferred offerings at a wide range of ages to spread funding cost and interest rate risk.

“We will have to see how the rules are developed and providers respond.”

Unfortunately, such new retirement income product developments were not recommended to be extended currently to SMSFs, given a lack of risk pooling available, he explained.

“Although such funds should be able to purchase these products, once developed, as part of SMSF assets,” he said.

“While we would like to see more flexibility in product design possible, this is an important first step down the path from simply account-based income solutions.”

Further, he said there was always a risk the budget would not be passed by both houses and therefore not legislated, however, the measure hopefully had bipartisan support, given the recommendations stemmed from the final report of the Financial System Inquiry (FSI) and Treasury analysis.

Treasury’s May 2016 “Retirement income streams review” found while it was satisfied the current rules were achieving the desired objective for account-based pensions, they did not allow access to the tax exemption for some types of product that could help individuals to better manage longevity risk.

Examples included products with longevity risk insurance features, such as deferred annuities, which do not pay income in every year, and pooled products, such as group self-annuitisation products and collective defined contribution schemes, where income payments vary from year to year depending on investment and mortality experience.

“This has hindered the development of these products, as noted in the Financial System Inquiry (FSI) report,” the review said.

“The comprehensive income product for retirement that the FSI discusses would depend on these pooled annuity-type products being developed.”

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