This article examines the recent amendments that have been made to Centrelink rules governing the provision of lifetime income streams.
Since 1 July 2019, amendments have been made to Centrelink rules governing the provision of lifetime income streams.
Lifetime income streams are intended to help people use their retirement savings in a way that supports their specific needs and helps manage the risk of people running out of retirement savings.
Lifetime income streams can include products that defer making payments for a period, for example, until someone reaches age 85 or later. The changes to the Superannuation Industry (Supervision) Regulations 1994 are designed to allow product providers to innovate and create new lifetime income products to benefit Australians who have already reached or who are approaching retirement.
An asset-tested income stream (lifetime) is a new category of income stream. A lifetime income stream purchased on or after 1 July 2019 is subject to different means testing rules to those purchased prior to 1 July 2019.
Grandfathering provisions will apply to lifetime income streams that commence prior to 1 July 2019.
A lifetime income stream needs to continue for the lifetime of one or more persons and must have payment amounts which are pre-determined with regard to the age, life expectancy and mortality of the primary beneficiary. The pool of assets supporting the income stream needs to be held for the collective benefit of all the fund’s income stream recipients.
A lifetime income stream cannot be a fixed term annuity, defined benefit income stream, nor an asset-test exempt income stream, for example, a term allocated pension.
Lifetime income streams can be purchased from super or non-super monies, however, in this article, we will only consider those commenced with super monies.
Since 1 July 2019, the new rules assess 60 per cent of payments from lifetime income streams. This reflects the fact that part of the payments made by the income stream are a return of a person’s initial investment amount, and therefore, not income.
For example, if a lifetime income stream pays income of $1,000 per year, then $600 per year will be assessed under the income test.
The new rules generally produce higher assessable income compared to the grandfathered rules, which allows a deduction amount, that is based on the purchase price and life expectancy, to reduce assessable pension payments.
For deferred lifetime income streams, there is no income assessment during the deferral period, however, the above assessment will apply once income payments commence.
Hence, a better Centrelink outcome may arise for income-tested pensioners who have purchased a lifetime income stream before 1 July 2019. Refer to Table 1.
Table 1: Comparison of income test treatment
Grandfathered income test before
1 July 2019
New income test from 1 July 2019
Total payments less deductible amount
Deductible amount = purchase price less residual capital value (if any) / relevant number
Non-deferred income stream:
60% of payments are assessed
Deferred income stream:
60% of payments are assessed once the deferral period ends and payments commence
Example 1: Gary – income test
Gary, age 68, is a homeowner who is affected by the income test and has $100,000 in super to invest in a lifetime income stream.
We compare the income test assessment for Gary who uses his $100,000 to start a lifetime income stream under the new rules from 1 July 2019 against the grandfathered rules.
We assume that:
– the income stream payment is $5,4581 in the first year with indexation; and
– the Centrelink deductible amount is $5,938 per year, for example, the purchase price of $100,000 / life expectancy of 16.84 years).
In this example, more income will be assessed under the new test than under the grandfathered test, due to the deductible amount reducing the assessable pension payments. See Table 2.
Purchased before 1 July 2019
Purchased from 1 July 2019
Assessable income = $5,458 – ($100,000/16.84)
= $5,458 – $5,938
= nil (in first year)
Assessable income = 60% x $5,458
= $3,274 pa
Chart 1 is an income test comparison between new and grandfathered rules over time.
Throughout the term of the income stream, the grandfathered income test provides a lower assessable income for Gary.
Whether Gary’s entitlements are calculated under the income test or the assets test will determine if the purchase of a lifetime income stream will benefit Gary.
Assets test assessment
The assets test applied will depend on whether the lifetime income stream complies with relevant superannuation law. One of the new requirements in superannuation law is that, to qualify for earnings tax concessions, innovative lifetime income streams have to meet ‘Capital Access Schedule’ (CAS) requirements2.
The CAS refers to the limits placed on the amount that an investor can recover from their lifetime income stream should they withdraw from the product (the surrender value) or should they die (the death benefit). The CAS only applies to lifetime income streams purchased with super money.
The person’s life expectancy and limits to amounts that can be commuted, will be an important consideration, especially if a person wishes to leave an inheritance for their family or they have health issues.
Under the CAS rules and depending on the contract, the access amount may be paid if the income stream is commuted:
– within 14 days of commencing the income stream, or
– on the death of a beneficiary within the first half of their life expectancy.
If the beneficiary dies after the first half of their life expectancy, only a portion of the access amount may be payable. See Calculation 1.
‘Previously commuted amounts’ is the total of any other commutations from the income stream before the time of the commutation.
‘Remaining life expectancy’ are the days remaining in the life expectancy period for the income stream after subtracting the number of days in the period:
starting on the retirement phase start day for the income stream, and
ending on the day of the commutation.
The ‘access amount’ at a particular time for a benefit supported by a superannuation interest (within the meaning of the 1997 Tax Act), is the total of:
the maximum amount payable, if the benefit was commuted on the retirement phase start day for the benefit, as determined by the contract or rules for the provision of the benefit, and
any instalments paid for the benefit after the retirement phase start day for the benefit and before the access time.
In this article we will only explain income streams which meet the CAS requirements.
Super purchased lifetime income streams which meet CAS rules
Lifetime income streams that meet the CAS rules will be assessed as 60 per cent of the purchase amount from the ‘assessment day’. This will continue until the client reaches their ‘threshold day’. This day is assessed as the life expectancy of a 65-year old male, which is currently age 84, or alternatively, for a minimum of five years. After this point, 30 per cent of the purchase amount will be assessed. For further details, refer to Table 3.
Table 3: Comparison of asset test treatment
Grandfathered asset test
New asset test
Purchase price – (deductible amount x term elapsed)
Deductible amount = (purchase price less residual capital value) / relevant number
60% of the purchase price counted from ‘assessment day’ to ‘threshold day’.
Assessment day is the later of:
· the day the client first satisfies a condition of release;
· the day the first amount was paid for the income stream;
· the day the client acquired the income stream, if no amount of money is identifiable as having been used to pay for the income stream, for example, collective defined contribution streams.
From ‘threshold day’, which is currently the later of either age 84 or a minimum of five years from ‘assessment day’, the income stream is assessed at 30% of the purchase price thereafter.
Where the lifetime income stream is reversionary, there are additional definitions for ‘assessment day’ and ‘threshold day’.
Example 2: Luke – asset test
Luke, age 68, is affected by the asset test and has an account-based pension of $450,000, as well as $100,000 in super, which he plans to invest in a lifetime income stream that meets the superannuation law CAS requirements.
We compare the asset test assessment if Luke uses his $100,000 to start a lifetime income stream under the new rules against the grandfathered rules.
We assume that:
– the income stream payment is $5,4581 in the first year with indexation; and
– the Centrelink deductible amount is $5,938 per year. For example, the purchase price of $100,000/life expectancy of 16.84 years).
In this example, Luke is assessed based on the assets test. Table 4 details how the new rule provides a lower asset assessment than the grandfathered rules, which translates to a higher Age Pension during the first year.
Table 4: Effect of the new rules on the Age Pension entitlement
Grandfathered asset test
New asset test
Lifetime income stream
$100,000 (asset counted in first year)
$60,000 – which is 60% of the purchase price counted from age 68 to 84, and 30% of the purchase price thereafter
Age Pension under the asset test during the first year
However, when we look at Chart 2, which summarises the asset test over a longer time, we find that while the new assets test may provide lower assessable assets for the first seven years, after this initial period, the grandfathered assets test produces lower assessable assets.
Chart 2: Asset test comparison between new and grandfathered rules (over time)
As can be seen in Chart 2, under the new rules, the assets test assessment will drop to 30 per cent of the purchase price after 16 years but will not reduce to zero, unlike the grandfathered assets test at a similar point in time.
Chart 3 illustrates that the new rules produce a greater Age Pension entitlement because of the lower assets test for the first seven years. After this time, we find the grandfathered rules provides a higher Age Pension. For Luke, his Age Pension will continue to be affected by the assets test during the term of the projection, rather than the income test.
Chart 3: Age Pension comparison between new and grandfathered rules over time
Factors to consider
For clients affected by the assets test, such as Luke, there may be a short to medium-term benefit from purchasing a lifetime income stream after 1 July 2019, because the lower assets test assessment will translate to a higher pension entitlement.
For asset-tested clients considering purchasing a lifetime income stream, a further important consideration is that after the initial years, certain clients may have their Age Pension revert to being assessed under the income test due to their lower levels of assessable assets later in retirement. At that later stage, their Age Pension entitlements may be less than what they would receive under the current income test rules as discussed above.
Reversionary lifetime income streams
If the lifetime income stream is reversionary, the following definitions apply:
‘Assessment day’ (applicable to the reversionary beneficiary)
The ‘assessment day’ depends on whether the income stream was already being paid to the primary beneficiary at their date of death or if the income stream is a deferred income stream where payments have not yet commenced.
1) If the lifetime income stream reverted to a reversionary beneficiary on or after the ‘commencement day’ (commencement day is the first day of the period to which the first payment of the income stream relates), the reversionary beneficiary’s assessment day is the day of the reversion.
For example, Mandy purchases a lifetime income stream with superannuation monies on 1 July 2019. Her income stream makes immediate payments. After Mandy’s death, the income stream reverts to a reversionary beneficiary, Ben, on 1 July 2020. As the income stream has already started making payments, it has already reached its commencement day. Therefore, Ben’s assessment day is 1 July 2020, the day the income stream reverted.
2) If the lifetime income stream reverted to a reversionary beneficiary before the commencement day in relation to the income stream, their assessment day is dependent on the following:
If the commencement day is before the day the reversionary beneficiary first satisfies a condition of release, then their assessment day is the commencement day.
If the commencement day is after the day the reversionary beneficiary first satisfies a condition of release, their assessment day is the later of the:
* day of the reversion
* day the reversionary beneficiary first satisfies a condition of release.
For example, John purchases a deferred lifetime income stream with superannuation monies. His lifetime income stream will start making payments on 1 July 2025. John dies on 1 July 2020 and his lifetime income stream reverts to his spouse, Linda. As the income stream has not started making payments, it has not reached its commencement day. Linda first satisfies a relevant condition of release on 20 September 2023. Therefore, Linda’s assessment day is 20 September 2023, the day she first satisfied a relevant condition of release (this day is after the date of reversion).
Threshold day (applicable to the reversionary beneficiary)
The threshold day applicable to the reversionary beneficiary is as follows:
1) if a lifetime income stream reverts to a reversionary beneficiary and the primary beneficiary’s assessment day for the income stream had already occurred, then:
a. if the original owner’s assessment day for the income stream had occurred before their death, the threshold day that applied or would have applied to the original owner of the lifetime income stream continues to apply to the reversionary beneficiary.
For example, Vincent purchases an immediate lifetime income stream on 1 July 2019 at age 70 (date of birth 7 October 1948). His ‘assessment day’ for the income stream is 1 July 2019. His threshold day is the day before he turns 84, which is 6 October 2032.
Vincent dies on 1 July 2025, and the lifetime income stream reverts to Jacky. As Vincent had already reached his assessment day, Jacky’s threshold day is the same as Vincent’s, 6 October 2032.
b. if the income stream was being assessed under the assets test at 30 per cent of the purchase amount (therefore the primary beneficiary threshold day has occurred) prior to the reversion, then it continues to be assessed at 30 per cent for the reversionary beneficiary.
c. if the reversionary beneficiary’s assessment day occurs after their threshold day, an asset-test concession only occurs after the reversionary beneficiary’s assessment day and it is the higher concession (30 per cent of the purchase price).
2) if a lifetime income stream reverts to a reversionary beneficiary and the deceased had not yet reached their assessment day, then the reversionary beneficiary’s threshold day is the later of age 84 or five years from the reversionary beneficiary’s assessment day.
Clients may require income stream products that protect against longevity risks. This means planners must be aware of the new Centrelink assessment rules that apply from 1 July 2019 for these lifetime income streams, so you can consider what is best for your clients.
William Truong, Technical Services Manager, IOOF TechConnect.
Assumptions: based on a Challenger Lifetime annuity quoted on 18/3/2019 for a 68-year old male with a super investment amount of $100,000, monthly payments in the first year totalling $5,458 for Liquid Lifetime Flexible (maximum withdrawal period of eight years), CPI indexation and nil adviser fees.
Superannuation Industry Supervision Regulation 1997 Regulation 1.06A(2).