Seven barriers to clients' retirement income

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With an increasing number of Australians entering retirement, removing regulatory barriers to the development and use of post-retirement products is more critical than ever before.

As such, ASFA has called on the Government to address the regulatory impediments to retirement income-stream products, to ensure all clients can have adequate income to fund the lifestyle they want in all of their post-work years.

Acting ASFA CEO Ross Clare said, “While we all want to live a long life in retirement, sometimes this can have financial consequences, which is why developing products which address longevity risk is crucial.

“With the Government committed to addressing the impediments which hinder the development and use of retirement income stream products, now is an opportune time to consider the positive adjustments that can be made to help facilitate this.”

Clare has highlighted the seven major impediments to retirement income stream products, as well as possible solutions:

1. Amend SIS regulations

Current SIS regulations are very focused on post-retirement products that are currently in the market, and severely limit the scope for innovation and new products. New supportive regulations should set out general requirements which are not linked to specific products, such that it is a principles-based framework.

2. Amend the APRA prudential standard on minimum surrender values of longevity products

While the APRA standard is relatively technical in nature, the bottom line is that it makes it more expensive to offer such products, and hence makes their pricing in the market less attractive to consumers.

Flexibility in APRA prudential standards on minimum surrender values is necessary to allow different types of longevity products to be offered during the deferral phase, such as pooling or not pooling longevity risk.

3. Means test treatment for longevity products

It is not fair to treat a financial asset where there may be no access to funds for a decade or longer the same way as, for example, a bank account at call. A full or partial exemption from the asset test of certain longevity products would substantially increase their attractiveness. Specifically, this may involve full or partial exemption of deferred lifetime annuities and like products from social security and aged-care assets tests during the deferral period, or during the period benefits are paid.

4. Reform of approval processes for longevity products

Currently, providers need to navigate a maze of red tape with separate, and sometimes inconsistent, approval processes from the ATO, APRA, ASIC and Centrelink. A one-stop shop offering a prompt and consistent approval process is needed.

5. Facilitating provision of advice on post-retirement products

Increased take up of longevity products will occur when fund members are better advised and educated about such products. The scaled advice operating guidelines being developed by ASIC should be drafted in such a way as to allow funds to provide all members with advice relating to retirement products.

6. Taxation of deferred annuities and other longevity products

Current tax provisions exempting the investment earnings supporting traditional post-retirement income streams do not apply to deferred annuities and like products. Specifically, there is a need to clarify:

• Earnings tax treatment of non-commutable deferred annuities and like products during the deferral period, to explicitly recognise that they are risk products

• Accruals tax treatment of non-commutable deferred annuities and like products to ensure that they can be bought, either by an individual, or by the trustee of a superannuation fund.

7. Allowing SMSFs to purchase deferred annuities and like products

Current SIS provisions only allow individuals to purchase annuities and like products. Self-managed super funds (SMSFs) should be permitted to purchase such products as well.