Threshold day change for lifetime income streams

Lifetime income streams

From 1 July 2019, lifetime income streams were added as a category of retirement income streams for social security means test purposes.

Lifetime income streams were added to cater for ‘innovative retirement income stream products’ that are now available due to changes in superannuation and tax laws.

Innovative retirement income streams include deferred annuities and group self-annuitised products that are designed to cater for longevity risk. Lifetime income streams also include immediate lifetime annuities.

Income and asset test assessment

All lifetime income streams purchased on or after 1 July 2019 that comply with a ‘capital access schedule’ receive a reduced assessable value under the social security assets test. 

A capital access schedule limits the amount of capital that can be accessed as a voluntary commutation or death benefit.  See section 15.4 of the FirstTech Social Security Guide for more information.

For lifetime income streams purchased on or after 1 July 2019 that comply with the capital access schedule, the social security assessment is:

Assessable assets:

·        60% of the purchase price assessable until the ‘threshold day’ (or minimum five years), then

·        30% of the purchase price assessable for the remainder of their life.

Assessable income:

·       60% of annual payment.

What is the threshold day?

The threshold day is the day the assets test assessment of a lifetime income stream generally steps down from 60% to 30%.

The threshold day is determined by the assessment day (generally the purchase date[1]) of the lifetime income stream:

·       For lifetime income streams with an assessment day before 1 January 2025, the threshold day is age 84.

·       For lifetime income streams with an assessment day on or after 1 January 2025, the threshold day is age 85.

FirstTech Comment

It’s important to note that for existing lifetime income streams with an assessment day before 1 January 2025, the threshold day is not changing, it will remain at age 84.

 The new threshold day of age 85 only applies to lifetime income streams with an assessment day on or after 1 January 2025.

Why did the threshold day increase?

The threshold day is calculated with reference to the life expectancy of a 65 year old male (rounded down) on the assessment day.

With the release of new Australian Government Life Tables, the life expectancy of a 65 year old male has increased.

According to the Australian Life Tables 2020-22 (which apply to lifetime income streams with an assessment day on or after 1 January 2025), the life expectancy of a 65 year old male is 20.30.

The threshold day calculation is then:

Threshold day = Life expectancy of 65-year-old male (rounded down) + 65[2]

Threshold day = 20.30 (rounded down to 20) + 65 = 85

Example

Jill (age 70) purchases an immediate lifetime annuity on 1 January 2025 for $100,000.

As the assessment day is on or after 1 January 2025, her threshold day is age 85.

Assets assessment:

·       $60,000 (60% of the purchase price) until age 85

·       $30,000 (30% of the purchase price) from age 85

Jill’s lifetime income stream will have the higher 60% asset test assessment apply until age 85, before it steps down to 30%.

If she had purchased the lifetime income stream before 1 January 2025, the threshold down would have been age 84 causing the assets assessment to reduce to 30% a year earlier.

[1] For deferred income streams the assessment day is more complicated and depends on whether the income was purchased with superannuation or non-superannuation monies.  See 1.1.A.280 Assessment Day of the Guide to Social Security Law for more information 

[2] Social Security (Value of Asset-tested Income Streams (Lifetime)) (Number of Expected Years) Instrument 2025

Section 1120AB(9) of the Social Security Act 1991