What the changes to the Social Security means test rules for lifetime income streams could mean for you.

Posted on 1 July 2019

From 1 July 2019 there is a new law changing the assets and income test treatment of lifetime income streams that are commenced on or after 1 July 2019. This is an important consideration for pre-and post-retirees and could change Age Pension and retirement income outcomes.

Social Security Income & Assets Tests

Eligibility for the Age Pension is based upon a number of factors, 2 of which are the income and Assets test. These tests are based on a person or couple’s level of income and assets over and above the certain allowable thresholds.

Assessable assets above the allowable thresholds will reduce Age Pension eligibility by $3 per fortnight for each $1,000 of assets. Assessable income above the allowable thresholds will generally reduce the Age Pension by 50 cents for each dollar of income.

It is important to note that different investments or investment structures (including lifetime income streams) are treated differently under the means test and can result in different Age Pension eligibility.

The social security means test rules for lifetime income streams

In February this year the government passed a new law that changes the means testing rules for certain lifetime retirement income streams (super and non-super lifetime pensions and annuities) commenced on or after 1 July 2019.

The new rules are designed to encourage the use of certain lifetime income streams which feature payments for life, irrespective of long a person may live, and reducing access to capital over life expectancy. These new rules can provide what can be an attractive means testing outcome for investors.

It is important to understand that the new rules do not apply to account -based pensions or term income streams (including term annuities). They also do not apply for any lifetime income streams made before 1 July 2019.

What are the changes under the social security income test?

The new rules will assess 60% of payments from lifetime income streams under the income test. For e.g. where a lifetime income pays income of $5,000pa, $3,000pa will be assessed under the income test.

What are the changes under the social security assets test?

The changes to the assets test for lifetime income streams may also generally be seen as attractive and can for assets test affected clients, improve Age Pension eligibility.

For lifetime income streams that commence on or after 1 July 2019 the new rules will generally assess:

  • 60% of the purchase price of the Lifetime income stream until age 84, subject to a minimum of 5 years and
  • 30% of the purchase price thereafter.

This concessional assessment can be attractive compared to alternate investment structures where 100% of any asset is assessable. Where the Age Pension is being reduced because of the assets test, an investment in a lifetime income stream subject to this assessment could immediately improve your Age Pension eligibility.

Case Study:

Wayne and Wendy are 66 years old. They own a well-maintained home and have scrimped and saved throughout their lives to accumulate $300,000 each in Super. Their plan had always been to convert the super to account-based pensions on retirement.

They also have $50,000 in the bank and have non-financial assets (car and home contents) of approximately $40,000. They are currently entitled to a part Age Pension of $12,706 pa based on their asset position.

A possible alternative given the new changes would be for Wayne and Wendy to consider a combination of income streams for their retirement. They could invest 25%of their retirement savings in a lifetime income stream – providing them a guaranteed income for life, no matter how long they live or how the market performs.

Given the lifetime income stream would commence after 1 July 2019, only 60% of the purchase price would initially count as an asset under the social security assets test and this would have the effect of reducing their assessable assets and increasing their Age Pension in the first year. Utilising the above, the part Age Pension would be $17,386, an increase of $4,680 in the first year alone.

If this is something you would be interested in finding out more about, please give the team at Vue Financial a call.

Vue Financial

The author is an employee of Vue Financial Pty Ltd, Authorised Representative of Australian Unity Personal Financial Services Limited ABN 26 098 725 145, AFSL 234459.

Important information:

The information on this web page is not advice and is intended to provide general information only. It does not take into account your individual needs, objectives or personal circumstances.