Australian Government, A Plan to Simplify Superannuation

Simplified Superannuation - Final Decisions

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Payment rules simplified

Key Points

  • The rules for when individuals can voluntarily choose to access their superannuation will not change — that is, individuals will still be able to access their superannuation once they reach preservation age and are able to take their benefits, and from age 65 even if they have not retired.
  • An individual will not be compelled to draw down their superannuation once they reach a particular age. They will be free to draw on it as and when they want.
  • Pensions will continue to receive favourable tax treatment. However, the rules defining a pension will be simplified.
    • If a person chooses to take a pension, they will be able to take out as much as they like when they like, provided a minimum amount is taken each year.

When benefits can, or must, be paid (page 19)

Voluntary withdrawal

The preservation arrangements will not change. The preservation age is already legislated to increase from 55 to 60 between the years 2015 and 2025. Members will still be able to take their superannuation once they have reached preservation age and are eligible to take their benefits or once they reach age 65.

Compulsory withdrawal abolished

The requirement for compulsory payment of benefits to members over age 65 who do not meet the current work test, and compulsory payment from age 75, will be removed. This will take effect from 10 May 2006.

Simplifying pension rules (page 20)

Replacing multiple rules for multiple types of pensions with a simple set of rules

Under the new arrangements, all pensions that meet simplified minimum standards will be taxed the same on payment. Earnings on assets supporting these pensions will remain tax exempt.

Pensions that meet existing rules and commenced before 1 July 2007 will be deemed to meet the new minimum standards.

The new pension standards

The new minimum standards for pensions will require:

  • payments of a minimum amount to be made at least annually, allowing pensioners to take out as much as they wish above the minimum (including cashing out the whole amount);
  • an amount or percentage of the pension cannot be prescribed as being left-over when the pension ceases; and
  • that the pension can be transferred only on the death of the pensioner to one of their dependants or cashed as a lump sum to the pensioner’s estate.

The payment rules will specify minimum limits only. No maximum will apply, with the exception of pensions which are commenced under the transition to retirement condition of release which are limited to 10 per cent.

Guaranteed lifetime pensions

Guaranteed lifetime pensions provided on an arm’s length basis that meet relevant existing requirements will continue to be acceptable.

Pension payments

Individuals will be able to choose the amount they take from their pension each year. A minimum amount will be required to ensure that the capital is generally drawn down over time. The minimum pension payments are set out below.

Indicative minimum annual pension payments

Age

Per cent of account balance

55 — 64

4

65 — 74

5

75 — 84

6

85 — 94

10

95 +

14

Transition to retirement (page 23)

As a consequence of the new pension rules, the transition to retirement rules will be amended to accommodate pensions that meet the new minimum standards.

From 1 July 2007, pensions commenced under the transition to retirement condition of release will allow no more than 10 per cent of the account balance (at the start of each year) to be withdrawn in any one year. The existing non-commutability rules for pensions purchased under the transition to retirement measure will continue to apply. Pensions commenced prior to 1 July 2007 which complied with the relevant rules for the transition to retirement measure at the time will be deemed to satisfy the proposed requirements.

Benefits not withdrawn (page 24)

There will be no compulsory cashing rules under the new arrangements. These changes will allow a person to keep their benefits in a fund indefinitely.

Where a person chooses not to draw down on their fund assets as a pension, then earnings on these assets will be subject to tax as assessable income of the fund at 15 per cent.

Commutation of complying pensions

Under the existing superannuation system, a person can gain access to a higher RBL and/or a pension assets test exemption if they take their benefits as a complying income stream. To gain access to these concessions the person has agreed to give up their right to access their capital.

The plan did not mention how these pensions would be treated under the new system. During consultation on the plan, the Government was made aware of the potential detrimental impact on members and product providers of allowing commutation of guaranteed income pensions. These pensions make up the majority of complying pensions that are currently provided. Various suggestions were made to allow all complying pensions to be commuted provided people with a guaranteed pension were made aware of the potential high cost to them of commuting such a pension, or restricting commutation to non-guaranteed complying pensions such as term allocated pensions.

After consideration of the submissions, the Government agrees that allowing commutation of guaranteed complying pensions would result in potential risks to members and product providers of guaranteed complying pensions. To restrict commutation to non-guaranteed complying pensions would provide preferential treatment to these people even though the decision to take either product was made on a similar basis. The Government therefore does not intend to increase the ability for people to commute a complying pension.

Treatment of existing allocated pensions

Existing allocated pensioners will be allowed to transfer to the new pension products from 1 July 2007 without the need to commute their existing pension. This will save these people the potential cost of moving to the new pension if they had to commute their existing pension to commence a new pension.

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Miscellaneous