The document discusses changes to the legislative environment for retirement income in Australia. Some of the key changes discussed include:
- New rules for assessing lifetime income streams under the assets and income tests from July 2019 which provide more clarity and flexibility.
- Products called innovative superannuation income streams which have more flexible withdrawal terms but are assessed more favorably under the assets test.
- Combining different income streams like account-based pensions and lifetime annuities can help provide more stable retirement income and allow retirees to better manage risks.
- Structuring retirement income using a combination of income streams is important given longevity risks and volatility in investment returns that make it difficult to rely solely on investments or the age pension.
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The changing environment for retirement income
1. The changing environment for retirement
income
Change and opportunity
Andrew Lowe / Sean Howard
Challenger Tech
2. 2
Retirement income
The changing legislative environment
Retirement
Income
Covenant and
CIPRs
(1 Jul 2020
and 2022)*
Managing Age
Pension impact
of rebalanced
Assets Test
changes
(1 Jan 17)
Innovative
Super Income
Streams
(1 Jul 17)
Downsizer and
unused
concessional
contributions
(1 Jul 18)
Super work test
exemption
(1 Jul 19)
New means
testing of
lifetime income
streams
(1 Jul 19)
Super
contribution
rules and $1.6m
transfer balance
cap on super
income streams
(1 Jul 17)
Expansion of
Pension Loans
Scheme
(1 Jul 19)
* Not yet legislated
3. 3
• An additional set of income stream rules (new category income streams) increasing flexibility for retirees
available since 1 July 2017
• No requirement to satisfy SIS minimum payments
• Classified as retirement phase income streams and qualify for tax-free earnings after a condition of
release has been satisfied
• Subject to a “declining capital access schedule”
• Limits lump sum commutations and death benefits but does not restrict income payments
Innovative super income streams
Increased income options for retirees
4. 4
Innovative super income streams
Declining capital access schedule
Source: Treasury Retirement Income Streams Review, 2016, 65 year old male
5. 5
Innovative super income streams
Including Deferred Lifetime Annuities (DLAs)
Adviser use only. PDS available from www.challenger.com.au.
6. 6
Innovative super income streams
Including Deferred Lifetime Annuities (DLAs)
Challenger Liquid Lifetime (flexible income option), monthly payments, CPI indexation, maximum voluntary withdrawal period of 18 years for males and 21 years for females and death benefit equal
to 100% of the initial investment for the first 9 years for males and 10 years for females after which time death benefit is equal to the maximum voluntary withdrawal value. Challenger eQuote
(24/01/2019)
Immediate
Deferred commencement
3 years 5 years 10 years 15 years 20 years
65 male $5,193 $6,271 $7,120 $10,231 $15,292 $24,831
65 female $4,957 $5,930 $6,680 $9,395 $13,770 $21,527
65 couple
(reversionary)
$4,675 $5,493 $6,101 $8,238 $11,487 $17,091
7. 7
• On 14 February 2019 the Government passed legislation amending the means testing of
lifetime income streams (“Asset-tested income stream (lifetime)”) commenced on or after 1
July 2019
• New rules provide clarity and certainty for both existing and new income streams
• New rules provide a foundation for the development of new retirement income streams
• Including Comprehensive Income Products for Retirement (CIPRs)
• Grandfathering of pre-1 July 2019 lifetime income streams under the current rules
• Current means test rules continue to apply
• No change for account-based or term income streams
New means test treatment
Lifetime income streams commenced on or after 1 July 2019
8. 8
• Lifetime income streams that meet the rules of Innovative Superannuation Income
Streams (with a reducing capital schedule)
• Income test: 60% of payments as income (for deferred lifetime products income will only be
assessed from when payments commence); and
• Assets test: 60% of purchase price as an asset until age 841, or for a minimum of 5 years, and
30% thereafter
• Challenger products treated this way will include:
• Challenger Guaranteed Annuity (Liquid Lifetime) - Flexible and Enhanced options
• Challenger CarePlus annuity
New means test treatment
Lifetime income streams commenced on or after 1 July 2019
1These rules link this initial assets test assessment to a period equal to the life expectancy of a 65 year old male at the commencement of the income stream, currently age 84.
This will change from time to time with new life tables.
9. 9
Legislated DSS Means Test changes
Liquid Lifetime Annuity (Flexible income option)
65 year old female. Challenger Liquid Lifetime annuity, monthly payments, CPI indexation. Flexible income option with maximum withdrawal period
10. 10
• Products that do not meet the rules of Innovative Superannuation Income Streams
(with a withdrawal or death benefit above the reducing capital schedule)
• Income test: 60% of payments as income; and
• Assets test: Asset value equal to the greater of:
• the amount determined under the new rules (60% until age 841, or for a minimum of 5 years, and
30% thereafter);
• the value of any current or future surrender value; and
• the value of any current or future death value.
• Challenger products treated this way will include:
• Challenger Guaranteed Annuity (Liquid Lifetime) – Regular option
New means test treatment
Lifetime income streams commenced on or after 1 July 2019
1These rules link this initial assets test assessment to a period equal to the life expectancy of a 65 year old male at the commencement of the income stream, currently age 84.
This will change from time to time with new life tables.
11. 11
Liquid Lifetime Annuity (Regular income option) - 15 year withdrawal period
Legislated DSS Means Test changes
65 year old female. Challenger Liquid Lifetime annuity, monthly payments, CPI indexation. Non-super monies illustrated. Regular income option with maximum withdrawal
guarantee.
12. 12
New means test treatment
Current vs new assets test assessment
Based on a Challenger Lifetime Annuity quoted 14/08/2019 for a 65-year old male with an investment amount of $100,000, monthly payments, Flexible option with maximum
withdrawal period (18 years) and Regular option with 100% withdrawal guarantee after 15 years, CPI indexation and nil adviser fees.
13. 13
New means test treatment
Current vs new income test assessment
Based on a Challenger Lifetime Annuity quoted 14/08/2019 for a 65-year old male with an investment amount of $100,000, monthly payments, Flexible option with maximum
withdrawal period (18 years) and first year payment of $5,280 and Regular option with 100% withdrawal guarantee after 15 years and first year payment of $3,534, CPI
indexation and nil adviser fees.
14. 14
Centrelink assessment of annuities
Retirement outcome using current rules (before 1 July 2019)
Source: Challenger Retirement Illustrator (26/07/2018). 66 year old couple. $225,000 investment each in account-based pensions 33% defensive/67% growth. Assumes returns
of 3.7% p.a. for defensive assets before investment fee 0.6% and platform fee 0.5%, returns of 7.7% p.a. for growth assets before investment fee 0.8% and platform fee 0.5%.
$75,000 investment each in Challenger Liquid Lifetime (flexible income option) annuities, monthly payments, CPI indexation and maximum withdrawal period. Amounts shown
are in today’s dollars. CPI of 2.5% p.a.
15. 15
Centrelink assessment of annuities
Retirement outcome using new rules (from 1 July 19)
Source: Challenger Retirement Illustrator (26/07/2018). 66 year old couple. $225,000 investment each in account-based pensions 33% defensive/67% growth. Assumes returns
of 3.7% p.a. for defensive assets before investment fee 0.6% and platform fee 0.5%, returns of 7.7% p.a. for growth assets before investment fee 0.8% and platform fee 0.5%.
$75,000 investment each in Challenger Liquid Lifetime (flexible income option) annuities, monthly payments, CPI indexation and maximum withdrawal period. Amounts shown
are in today’s dollars. CPI of 2.5% p.a.
16. 16
Structuring a comprehensive income stream
• Trent and Tracy (both aged 65) are a couple and own their home
• They have $300,000 each in account-based pensions (deemed)
• Their investor risk profile is 50% defensive and 50% growth
• They have $20,000 in personal assets and $50,000 in cash and TDs
• They want retirement income of $60,604 p.a.
• But they need $42,000 p.a. to meet essentials
• Annualised age pension is currently $13,8811
Trent and Tracy
1 Based on 20 September 2018 Centrelink rates and thresholds
17. 17
A comprehensive income stream today
Income for Trent and Tracy might need to last a long time
1. 1 ALT 2010-12, with 25 year improvement factors. Assumes both persons exactly age 65, calculated at July 2018
Couple life expectancy
with improvements: 93
Standard population
couple life expectancy:
90
0.0%
2.0%
4.0%
6.0%
8.0%
65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 101 103 105 107 109 Age
Likelihood of savings needing to last to exact ages1
73.5% chance will need assets to last past age 90!
9.3% of couples may need
assets to last past age 100
18. 18
A comprehensive income stream today
And the Age Pension alone is unlikely to be adequate for many
Is the Age Pension enough?
• Single $23,823.80 p.a.
• Couple $35,916.40 p.a.
Centrelink rates as at 20 September 2018
ASFA Retirement Standard, June 2018. Available from www.superannuation.asn.au.
19. 19
A comprehensive income stream today
Account based pensions based on average fixed returns
Source: Challenger Retirement Illustrator (07/11/2018). Amounts shown are in today’s dollars. Investment return sourced from Willis Towers Watson data. Fixed return scenario assumes returns of
3.7% p.a. for defensive assets before investment fee 0.6% and platform fee 0.5%, returns of 7.7% p.a. for growth assets before investment fee 0.8% and platform fee 0.5%. CPI of 2.5% p.a. Cash
earns 4%. Account-based pension 50% defensive/50% growth.
Guaranteed income gap
20. 20
A comprehensive income stream today
Retirement capital – average net is different to market experience
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 101 103
Accountbasedpensionbalance
Age
Stochastic 1 Stochastic 2 Stochastic 3 Stochastic 4 Fixed returns
Source: Challenger Retirement Illustrator (07/11/2018). Amounts shown are in today’s dollars. Investment return sourced from Willis Towers Watson data.
Fixed return scenario assumes returns of 3.7% p.a. for defensive assets before investment fee 0.6% and platform fee 0.5%, returns of 7.7% p.a. for growth
assets before investment fee 0.8% and platform fee 0.5%. CPI of 2.5% p.a. Cash earns 4%. Account-based pension 50% defensive/50% growth.
21. 21
A comprehensive income stream today
Account based pension outcome from 2000 scenarios
What level of confidence is required?
What impact would changing income have
on these outcomes?
Source: Challenger Retirement Illustrator (07/11/2018). Analysis to 50% chance one person of couple is still alive.
Portfolios have been tested against 2,000 market scenarios that represent how markets could perform in the future.
Market data sourced from Willis Towers Watson.
22. 22
Income layering
A comprehensive income stream today
Comfortabl
e living
Basic
income
needs
Account-based
pension
Annuity
Age Pension
Peak spending years
Active phase Passive phase Aged care
23. 23
A comprehensive income stream today
Combining income streams
40%
Portfolio Current Proposed
Account based pension $600,000 $480,000
Lifetime annuity Nil $120,000
Total $600,000 $600,000
63%
37%
Account based pension
100%
Lifetime annuity
50%50%
Total asset allocation
25. 25
A comprehensive income stream today
Retirement cash flow (constant returns)
Source: Challenger Retirement Illustrator (07/11/2018). Amounts shown are in today’s dollars. Investment return sourced from Willis Towers Watson data.
Fixed return scenario assumes returns of 3.7% p.a. for defensive assets before investment fee 0.6% and platform fee 0.5%, returns of 7.7% p.a. for growth
assets before investment fee 0.8% and platform fee 0.5%. CPI of 2.5% p.a. Cash earns 4%. Account-based pension 50% defensive/50% growth. Challenger
Liquid Lifetime annuity assumes $60,000 investment each in the flexible income option (standard death benefit), monthly payments, CPI indexation and
maximum withdrawal period.
26. 26
A comprehensive income stream today
Comparison outcome from 2,000 scenarios
Source: Challenger Retirement Illustrator (07/11/2018). Analysis to 50% chance one person of couple is still alive.
Portfolios have been tested against 2,000 market scenarios that represent how markets could perform in the future.
Market data sourced from Willis Towers Watson.
27. 27
A comprehensive income stream today
Estate planning outcome from 2,000 scenarios
Source: Challenger Retirement Illustrator (07/11/2018). Analysis to 50% chance one person of couple still alive. Portfolios have been tested against 2,000
market scenarios that represent how markets could perform in the future. Market data sourced from Willis Towers Watson.
28. Disclaimer. The information contained in this presentation is current as at 5 July 2018 unless otherwise specified. It is provided as
shown by Challenger Retirement and Investment Services Limited (CRISL) ABN 80 115 534 453, AFSL 295642, Challenger Life
Company Limited ABN 44 072 486 938, AFSL 234670 ("Challenger Life") and is intended solely for holders of an Australian
financial services licence or other wholesale clients (as defined in the Corporations Act 2001 (Cth)). The information contained in
the presentation must not be passed on to retail clients. It is presented for information purposes only and is intended as general
factual information only rather than as financial product advice. It has been prepared without taking account of any person’s
objectives, financial situation or needs. Because of that, each person should, before acting on any such information, consider its
appropriateness, having regard to their or their client’s objectives, financial situation and needs. The information must not be
copied or disclosed in whole or in part without the prior written consent of Challenger Life and CRISL. In preparing the information
presented, the presenters have relied on publicly available information and sources believed to be reliable, however the
information has not been independently verified by the presenters. While due care and attention has been exercisedin the
preparation of this information, none of the presenters give any representationor warranty, either express or implied, as to the
accuracy, completeness or reliability of that information. The information presented is not intended to be a complete statement or
summary of the industries, markets, securities or developments referredto in the presentation.
Neither Challenger Life, CRISL nor their related entities, nor any of their directors, employees or agents accept any liability for any
loss or damage arising out of the use of all or part or, or any omission, inadequacy or inaccuracy in, the information presented.
Disclaimer
Challenger Life is the issuer of annuities under the Challenger Guaranteed Income Plan, Challenger Guaranteed
Income Plan (Complying Annuity), Challenger Guaranteed Income Plan (Liquid Lifetime), Challenger Guaranteed
Annuity, Challenger Guaranteed Annuity (Complying) and Challenger Guaranteed Annuity (Liquid Lifetime). CRISL
issuers interests in the Challenger Guaranteed Income Fund ARSN 139 607 122. Offers of interests in these
products are contained in the relevant current product disclosure statements (“PDS”)which are on the website
www.challenger.com.au. The relevant PDS should be consideredbefore making any investment decision. Past
performance is not a reliable indicator of future performance.
Any opinions expressedin this presentation (including any as to future matters) may be subject to change. This is
because outcomes may be affectedby known or unknown risks and uncertainties that are not able to be presently
Identified. Examples and comparisons used in any presentation are for illustrative purposes only. Neither Challenger
Life nor CRISL is licensed or authorised to provide tax advice. Because this is a complex area, it is strongly
recommended that investors obtain professionaladvice (including taxation and social security advice, if applicable)
before making a retirement investment decision. No presenter is obliged to update the information in this presentation.
Some or all of Challenger group companies and their directors may benefit from fees, commissions and other benefits
received by another group company