There were a lot of small tweaks in the Federal Budget handed down on Tuesday.
One that has received scant attention so far is the confirmation of an intention to change the Centrelink assessment of lifetime annuities that have been given a fancy new name; Comprehensive Income Product for Retirement.
These CIPR’s are a tweak of an old product called ‘lifetime annuities’.
The way a lifetime annuity works is that you give an insurance company a lump of money, and they promise you regular income for as long as you live, but when you die, that income (and the asset) dies with you.
Before 20 September 2003, such annuities were exempt from the age pension assets test. Between September 2003 and September 2007 the Centrelink asset value was assessed at 50% of the amount invested, and then for new annuities purchased from 20 September 2007 onward, the full amount of the investment was counted as an asset, with annual reductions based on your life expectancy.
The 2018 Federal Budget announced a return to a partial exemption for such annuities, or CIPR’s as they will be known (as if the finance industry needed more acronyms!).
So, is the CIPR with a 60% asset test exemption good news?
We believe that it will be useful for some people. But not for all. Why?
Because while the reduction of the assessed value is attractive, the way the income is assessed is less attractive than in previous versions.
Take the example of a 70 year old single female, with $192,200 in super, owning her home, and with $30,000 worth of household contents and motor vehicles.
At present she would be entitled to the full age pension of $907.60 per fortnight, including supplements. That equals $23,597.60 per annum.
The $192,200 in super could buy her a lifetime annuity (current quote from Challenger Life) that pays $15,000 per annum. Using the current rules, the income test is done by dividing the purchase price by her life expectancy to come up with an annual ‘return of capital’ in this case $10,796 per annum. The balance is considered as ‘income’. In this example that would mean $4,204 of the $15,000 annual cashflow being assessed as income by Centrelink.
A single person can have $4,368 per annum of deemed income before the pension is reduced, so by buying an annuity under the existing rules she would still get the maximum age pension.
But come July 1, 2019 when the new rules are introduced, things will change. Under the proposed assets test, the $192,200 that she invests to buy that income stream would be assessed at only $115,320 (60% of the purchase price) which is great if she has a problem with the assets test. But then 60% of the income payments received will also be counted for the income test. This means that her deemed income goes from $4,204 under the old rules, (capital divided by life expectancy) to $9,000 under the new rules.
Because the maximum limit for income before the pension starts to reduce is only $4,368, she will get a reduced Centrelink age pension with this new product.
The reduction is $0.50 of pension for every $1.00 above the $4,368. Doing the math, we find that she would lose $2,316 per annum of Centrelink benefit.
So a single pensioner in that circumstance would be worse off under the new rules than the ones we currently have.
Not every situation is going to be the same. There will be some scenarios where the use of these new lifetime income products may be able to access some age pension where they may have previously been locked out by the current means testing.
Every case is different. We love analysing the personal situations of our clients to find the best combination of outcomes that is right for you.
So if you, or a friend is navigating the complex world of retirement investing, give your Quill Group adviser a call to discuss what is right for you.