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A More Flexible and Adaptable Retirement Income System


Government initiatives

The Government has significantly improved the retirement income system since being elected in 1996. Relevant Government initiatives are outlined at Attachment B. With the ageing of the population, the retirement income system needs to be more flexible and adaptable. The following enhancements to the retirement income system will further broaden the availability of superannuation, provide more choices in financing retirement income, make superannuation more adaptable to changing work arrangements and improve the integrity of the system.

Removing the work test for superannuation contributions before age 65

Historically, superannuation has been aimed at providing working people with a vehicle to save for their retirement. Accordingly, only people who are, or recently have been in the workforce can make superannuation contributions. The general rule is that to make superannuation contributions, a person below age 65 must have worked at least 10 hours in a week sometime in the past two years.

Because superannuation assists Australians to achieve their retirement income goals, the Government is making superannuation available to more Australians. Policies such as allowing contributions on behalf of low-income spouses and introducing child accounts have provided more people with the opportunity to share in the benefits of superannuation for the first time. Also, when a marriage breaks down, superannuation can be split enabling non-working spouses to hold superannuation in their own name.

Every Australian should be able to save for their retirement in a prudentially supervised and concessionally taxed environment. Therefore, from 1 July 2004, the work test on who can contribute to superannuation will be removed for anyone under the age of 65. This also will simplify an important part of the superannuation system.

People who become eligible to contribute to superannuation as a result of this measure also may be able to claim a tax deduction for their contributions. To ensure this opportunity is not abused, people under 18 must satisfy a work test in the year they contribute to qualify for a deduction.

Simplifying the work test rules for those aged over 65

Additional work rules apply to people aged 65 and over. The work test is consistent with superannuation's intended role as a retirement income vehicle. The rules apply to when a person can make superannuation contributions and when a superannuation fund must pay out benefits. People aged 65 to 74 must work at least 10 hours in each week to be eligible to make contributions; a superannuation fund must also pay out a member's benefits if they fail this test.

Work opportunities for people over 65 are likely to increase as the population ages. However, the current weekly work test is too stringent and does not accommodate more flexible working arrangements, such as seasonal and irregular part-time work. It also imposes an administrative burden on individuals and superannuation funds.

From 1 July 2004 the Government will change the contribution and cashing rules for people aged 65to74 to an annual work test so these rules are consistent with current and future work trends. The Government will consult with the industry and community on an appropriate work test.

Superannuation benefits for people over 75

Substantial tax concessions are provided to superannuation to encourage people to save for their retirement. People can now make superannuation contributions until they turn 75, allowing them to take advantage of the superannuation tax concessions to accumulate more for their retirement. These concessions assume people will draw down on their superannuation benefits later in their lives.

People aged 75 and over cannot contribute to superannuation unless an award requires it. However, a person who works at least 30hours a week can keep their benefits in a superannuation fund past this age. This means they may not have to access their accumulated superannuation benefits at all during their lives.

The current rule could allow superannuation to be used specifically for estate planning rather than retirement income purposes, which is inconsistent with the purpose of providing tax concessions to superannuation. To ensure people do access their superannuation, the law will be amended so superannuation funds start paying benefits to a person, as soon as practicable after they reach age75 either as a lump sum or an income stream. This will not apply to people over 75 who still receive superannuation contributions under an industrial award. This measure will commence on 1 July 2004.

Increased choice and competition in the income streams market

As people live longer, they are likely to spend more years in retirement. Given the significant tax concessions provided to superannuation, it is important that superannuation benefits are used to support living standards in retirement. Taking benefits as an income stream is a good way to achieve this support.

There are a number of tax and social security concessions to encourage people to purchase an income stream. Different concessions apply to different types of income streams based on their characteristics. For example:

  • Complying income streams attract both a social security assets test exemption and tax concessions (including the higher pension reasonable benefit limit). These concessions are provided because these income streams require an orderly draw down of capital over a person's lifetime or life expectancy. The person must forgo access to their capital in exchange for the income stream. This means the person cannot access the capital supporting the income stream as a lump sum (ie, they are non-commutable).
  • Allocated income streams are more flexible than complying income streams: a person can commute the income stream at any time and determine their annual income within a defined range. As allocated pensions do not require an orderly drawdown of capital throughout retirement, they do not qualify for the social security exemption or the higher pension reasonable benefit limit. However, like complying income streams, they receive a 15percent tax offset.

People should have choices about how they invest their superannuation benefits in retirement. Therefore the current approach of providing incentives to encourage people to purchase an income stream remains appropriate. However, the Government has reviewed the nature of these concessions and the restrictions on complying income streams.

The Government will extend complying status to new market-linked income stream products which require an orderly draw down of capital over a person's life expectancy. These products will be non-commutable and will restrict payments to a set proportion of the account balance. Allocated income streams do not have these characteristics. These characteristics are regarded as necessary for a product to be given complying status.

Unlike existing complying income streams, market linked products will not provide a guaranteed income stream for the term of the product. The amount of income each year can rise or fall depending on the value of the investments supporting the pension. As the income stream is not guaranteed, some superannuation funds will be able to provide complying income streams for the first time, increasing both choice and competition within the complying income streams market.

The higher pension reasonable benefit limit and a 50percent assets test exemption will apply to these products purchased on or after 20September2004. This will allow industry time to develop and have these products on the market.

Change to assets test exemption for complying income streams

The social security means test consists of separate income and assets tests. These tests help keep the age pension affordable and sustainable by requiring people with significant resources to draw on them before calling on the community for assistance through the age pension. The assets test aims to restrict wealthier individuals from accessing the age and service pensions. The assets test has generous free areas and cut-out points. A home-owning couple is still eligible for some age pension under the assets test if they have up to $466,500 in assessable assets (in addition to their home).

The current assets test exemption for complying income streams is a very generous concession. It enables wealthy individuals with assets substantially above the assets test thresholds to obtain an age pension. This is inconsistent with the intended role of the age pension to provide retirement income for people who have not been able to fully save for their retirement.

To better balance the objectives of the age pension with the need for incentives to purchase particular income streams, the Government will reduce the current 100percent exemption for purchased complying income streams to a 50percent assets test exemption for products purchased on or after 20September 2004. A 50percent assets test exemption is still a generous concession. Complying income streams purchased before this date will not be affected by this change and will continue to qualify for a 100percent assets test exemption. This means that no person will have their current age or service pension reduced on the introduction of this change.

Making it easier for individuals in the transition to retirement

A person below age 65 must retire or leave employment before they can access their superannuation benefits. This rule may lead to people deciding to retire prematurely just so they can access their superannuation. The rule does not adequately cater for more flexible workplace arrangements where people may choose to reduce their work hours as they get older. Such arrangements are likely to become more prevalent.

As the population ages, the need for people to retain a connection with the workforce will become increasingly important. The skills and experience of older Australians will make them valuable employees with much to contribute. In recognition of this, people who have not retired will be able to access their superannuation as a non-commutable income stream once they reach their superannuation preservation age.

This measure will provide people with more flexibility in developing strategies in their transition to retirement. For example, a person might choose to continue to work with their employer on a part-time basis, and use part of their superannuation to supplement their income instead of leaving the workforce altogether.

This policy will commence on 1 July 2005. This timing will allow for consultation with the superannuation industry and community about the characteristics of the non-commutable income streams and for the industry to develop and have these products on the market. Other aspects of the policy, including whether there is a need for limits on the amount a person can access will also need to be settled during consultation.

Preservation of rolled-over employer eligible termination payments

A person generally cannot access their superannuation benefits unless they have reached their preservation age and have retired. Since 1 July 1999, all new contributions to superannuation have been preserved to ensure superannuation savings are used for their intended purpose of supporting retirement income.

The general rule relating to the preservation of contributions does not apply to employer eligible termination payments that have been rolled over into a superannuation fund (for example, a redundancy benefit paid by an employer). As a result, such benefits can be withdrawn from a superannuation fund before preservation age, despite the fact they benefit from tax concessions which are intended to support their use for retirement income purposes.

The Government will remove this anomaly so that all employer eligible termination payments which are rolled over into superannuation from 1July 2004 are preserved. The change will not affect employer eligible termination payments rolled over before that date.

Actuarial certificates for account based income streams

Superannuation funds receive a tax exemption on the income they receive from assets supporting their current pension liabilities. To qualify for this tax exemption the fund must obtain an actuarial certificate stating that the assets are needed to meet the fund's pension liabilities. This certificate ensures that funds do not overstate the value of assets supporting current pensions to receive a tax advantage.

Superannuation funds which only pay allocated pensions also must obtain an actuarial certificate to qualify for the tax exemption. Unlike traditional defined benefit pensions (for example pensions payable for life), allocated pensions are similar to a bank account with the amount of income that can be drawn depending on the amount of assets in the account. Where a fund only pays an allocated pension and holds no other pension assets, an actuarial certificate is not needed as the fund's entire pension assets are being used to support pensions.

The Government will remove the requirement for a superannuation fund to obtain an actuarial certificate for assets supporting allocated pensions, and the new complying market-linked pensions, from the 2004-05 financial year. This will reduce compliance costs for pension providers.

Simplifying the superannuation guarantee notional earnings bases

The Superannuation Guarantee requires employers to provide superannuation support for their employees. The minimum support required is 9percent of an employee's notional earnings base. For most employees, the notional earnings base is remuneration earned in their normal working hours (without payments for overtime). This is commonly referred to as ordinary time earnings.

The Superannuation Guarantee legislation allows some employers to pay superannuation on an earnings base that existed back in 1991 before the Superannuation Guarantee was introduced. This means an employee can be paid lower superannuation contributions than another employee in similar circumstances. This can have a significant impact on this person's standard of living in retirement.

To ensure all employees are treated in a consistent manner for Superannuation Guarantee purposes, the Government will remove these lower earnings bases. Ordinary time earnings will be the earnings base for determining SG liability for all employees. Employers affected by this change will have until 1July2010 to meet this requirement.


Next: Attachment A: Impact on underlying cash balance of the retirement income initiatives ($m)

Previous: The importance of planning for retirement


Commonwealth of Australia 2004
ISBN 0 642 74231 6