A Plan to Simplify and Streamline Superannuation
This chapter outlines the proposals to simplify payment rules so fewer restrictions apply on how and when an individual may take their superannuation benefits.
3.1.1 Current arrangements
Under the current rules, a member of a superannuation fund can choose to take their benefits out of their fund once they have reached preservation age and retired or once they have reached age 65.
Under the current rules, funds are forced to pay out the benefits of members who have reached age 65 and who do not meet a work test. Specifically, a fund must commence paying a person’s benefit if they are over age 65 and have not worked at least 240 hours in the most recent financial year. Funds must be satisfied that members in this age group continue to meet this rule each year in order for benefits to be retained in a fund.
Once a person reaches the age of 75, normally their fund must commence paying out their benefits irrespective of whether or not they are still working.
3.1.2 Proposed new rules
The preservation arrangements would not change. The preservation age is already legislated to increase from 55 to 60 between the years 2015 and 2025. Members would still be able to take their superannuation once they have reached preservation age and retired 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 would be removed — that is, there would be no forced payment of superannuation benefits after age 65. Due to these changes, superannuation funds would no longer have to administer work tests to determine whether the benefits of members aged between 65 and 74 must be paid out.
The requirement that benefits must be paid out regardless of a person’s work status from age 75 would also be removed.
These changes would mean that a person would be able to keep their benefits in their superannuation fund indefinitely, taking out as little or as much of their benefits as they choose. If they choose to take their benefits in pension form, then earnings on the assets supporting that pension would continue to be exempt from tax — earnings on other assets would continue to be subject to tax as assessable income of the fund at 15 per cent.
3.2.1 Current arrangements
At present, the superannuation legislation contains rules for five different pension products and seven different annuity products, each with their own separate payment rules. The different income stream products currently include lifetime and life expectancy income streams, market-linked income streams (MLIS) and allocated income streams. The design of the pension will also affect whether the pensioner is eligible for social security or tax concessions. These different rules add significant complexity to the superannuation system, especially for retirees.
3.2.2 Overview of proposed arrangements
Replacing multiple rules for multiple types of pensions with a simple set of rules
The decision to take a pension has in the past been a daunting prospect for many retirees, as different pensions can have different tax treatments and thus produce different retirement income results. In addition, the market’s ability to meet consumer demand has been constrained by restrictions that limit flexibility and reduce choice.
Under the proposed arrangements, all pensions that meet simplified minimum standards would be taxed the same on payment. Earnings on assets supporting these pensions would remain tax exempt.
Pensions that meet existing rules and commenced before 1 July 2007 would be deemed to meet the new minimum standards.
The proposed simple standard
The new minimum standards for pensions commencing on or after 1 July 2007 would require:
- payments of a minimum amount to be made at least annually (see section 3.2.3), allowing pensioners to take out as much as they wish above the minimum (including cashing out the whole amount);
- no provision to be made for an amount to be left over when the pension ceases; and
- that the pension could 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 would specify minimum limits only. No maximum would apply, with the exception of pensions which are commenced under the transition to retirement condition of release (see section 3.3).
Guaranteed lifetime pensions
Guaranteed lifetime pensions provided on an arm’s length basis that meet relevant existing requirements would continue to be acceptable.
3.2.3 Pension payments
Individuals would be able to choose the amount they take from their pension each year. A minimum amount would be required to ensure that the capital is generally drawn down over time. This would enable a larger account balance to accumulate in the early years with a drawdown of capital and income in later life if that suits the pensioner’s circumstances. If a pensioner finds they have unexpectedly large expenses in a particular year, they could withdraw as much as required to meet that need, including the whole amount.
The following minimum pension payments are proposed. These minimum pension amounts would provide greater flexibility for a pensioner as to the amount they choose to withdraw each year.
Proposed minimum annual pension payments (sample only)
Per cent of account balance (average)
55 — 64
65 — 74
75 — 84
85 — 94
Chart 3.1 shows the impact on a pensioner’s account balance of only taking the minimum compared with two existing products — an allocated pension and a MLIS (payable to age 100, drawing the minimum each year). The chart is based on an initial account balance of $100,000, an assumed 5 per cent earnings rate, income paid at the start of the year, and no fees. The chart reflects a smoothing of payments over the life of the pension.
Chart 3.1: Account balance by age
A pensioner would be able to retain greater amounts in their account to meet expenses in later life while still having choices as to the amount they withdraw for their day-to-day living expenses.
Since 1 July 2005, new regulations have allowed a person who has reached their preservation age (currently 55) to take their benefits in the form of a non-commutable pension while they are still working.
The regulations for this measure allow benefits to be paid out only in the form of a ‘complying’ pension or an allocated pension which the person is unable to commute to cash prior to satisfying a full condition of release (such as retiring or reaching age 65).
As a consequence of the changes proposed in this paper, these rules would be amended to allow pensions that meet the new minimum standards (see section 3.2.2) to be able to provide transition to retirement benefits.
The current rules enable individuals to draw down around 10 per cent of the account balance each year depending on the pension product and member’s age. To simplify these arrangements, the proposed new rule would allow no more than 10 per cent of the account balance (at the start of each year) to be withdrawn in any one year. This caps the amount that could be withdrawn to prevent excessive dissipation of assets. It would also simplify the current rule. The existing non-commutability rules for income streams purchased under the transition to retirement measure would continue to apply. Pensions commenced prior to 1 July 2007 which complied with relevant rules for the transition to retirement measure at the time would be deemed to satisfy the proposed requirements.
3.4.1 Current arrangements
As noted previously, under current rules, funds are forced to pay benefits to members under certain circumstances, such as attaining age 65 and ceasing employment, or attaining age 75.
3.4.2 Proposed new rules
There would be no compulsory draw down rules under the new arrangements. These changes would 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 would generally be subject to tax as assessable income of the fund at 15 per cent.