Thu, 29 Nov 2018 - 19:27
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Introductory Speech: Social Services and Other Legislation Amendment (Supporting Retirement Incomes) Bill 2018

This bill implements measures announced as part of our government's 2018-19 budget to enhance the standard of living of older Australians by giving retirees greater choice and flexibility when it comes to managing their finances in retirement. This bill provides for three changes to support Australians in retirement, including new means test rules to encourage the development and take-up of lifetime retirement income products, an expansion of the Pension Loans Scheme and an increase and expansion of the pension work bonus.

In 2017 the government introduced changes to the superannuation regulations, facilitating the development of innovative retirement products in Australia. This bill outlines how these products will be assessed under the social security means test. These new rules pave the way for the development of retirement income products in Australia that support greater choice and flexibility for Australians in retirement. The new means test rules will take effect from 1 July 2019. They fairly assess pooled lifetime income stream products.

A pooled lifetime income stream is a product that involves grouping a number of people's savings together. Those who contribute then receive a regular payment for the rest of their life. These products can help manage the risk of a person running out of savings in retirement. The new means test rules will apply to all pooled lifetime income products held by social security or veterans affairs income support recipients that are acquired or purchased on or after 1 July 2019. Products purchased before 1 July 2019 will not be affected by these new rules. The rules will not change for account based income streams, the most common retirement income product.

Under the income test, the new means test rules will assess 60 per cent of payments from a pooled lifetime income stream as income. 

This reflects that part of the payments made by the income stream are a return of a person's initial investment amount and therefore not income.

Under the assets test, the new means-test rules will assess a proportion of the total purchase amount for the pooled lifetime income stream. At the time of purchase, 60 per cent of the purchase amount will be assessed. This will continue for a minimum of five years or until the person reaches the life expectancy of a 65-year-old male, currently the age of 64—whichever is longer. After this point, 30 per cent of the purchase amount will be assessed.

This treatment takes into account the restrictions placed on these products by the superannuation regulations. When someone invests in a pooled lifetime income stream, they have limited access to their initial capital investment. By assessing only 60 per cent, we recognise the limited ability for these income streams to be cashed in for self-support. By assessing 30 per cent in later life, the rules also recognise that the pooled lifetime income stream continues to have some value to the person but avoids unfair outcomes when there is no ability to cash in the income stream.

An income stream can be sold outside of superannuation where it is not bound by the new superannuation regulations. In these situations, the new rules have some additional provisions to make sure that this is factored into the means-test assessment.

The bill also amends the rules that apply to investment-type life insurance products. These products function similarly to additional benefits that can be attached to pooled lifetime income streams. The rules for investment-type life insurance products have been amended to make sure they are consistent with the new rules for pooled lifetime income streams. This stops two pensioners buying products with very similar features but that would result in very different means-test outcomes.

Stakeholders in the financial product and retirement income industries have been consulted throughout the development of the new means-test rules. Stakeholders have been broadly supportive of this means-testing approach, and the new rules take into account their feedback.

Whilst it is expected that the take-up of these new products will be modest in the near future, because of these new means-test rules, it is expected that more products will be able to come to market, giving pensioners more choice and flexibility around how they manage their retirement savings. Pensioners will now be able to buy these products confident as to how their pension will be impacted by their purchase. The new means-test rules are estimated to cost $20.2 million over four years.

A second element of this bill is to increase and expand the pension work bonus. The work bonus encourages Australians of pension age who are receiving a pension to undertake employment to supplement their pension. Presently, under the work bonus, the first $250 of employment income a fortnight is not counted in the pension income test. This works in addition to the standard income-free area, currently $172 per fortnight for a single pensioner. This allows, for example, a single age pensioner with no other income to earn up to $422 a fortnight from employment and still receive the maximum rate of age pension.

Pensioners are also able to build up any unused amount of the $250 fortnightly exemption to a total of $6,500. This amount can be used to exempt future earnings from the pension income test, so a pensioner could earn up to $6,500 a year extra without it affecting his or her pension. Any unused amount of the work bonus is held in a work-bonus income bank. The income bank is not time limited. If unused, it carries forward, even across years.

The changes to the work bonus in this bill will commence from 1 July 2019. These changes will allow pensioners of pension age to earn more from working without reducing their pension payments. Social security pensioners of pension age and veterans affairs pensioners of service pension age will be able to earn up to $300 per fortnight from work before this income is assessed under the pension income test.

Additionally, the work bonus maximum accrual amount will increase to $7,800. The work bonus was set at $250 per fortnight when the current scheme was introduced in 2011, and has not been increased since.

Increasing the work bonus amount will allow pensioners to retain more of their pension when they receive income from work. For example, consider Rohan, a single age pensioner working two days a week and earning $500 a fortnight. He has no other income, and his assets are below the asset test free area. His pension is currently reduced because of his earnings. Under the changes, the first $300 of Rohan's earnings will not be assessed, and only $200 will count for the pension income test. His pension will increase by $25 per fortnight.

The bill also expands the work bonus to the self-employed. Earnings from self-employment are currently excluded from the work bonus. By expanding the work bonus, this bill will reward all work done by pensioners, including work done by the self-employed. To understand how the changes to the work bonus may impact a self-employed person, consider Nisha. Nisha is a single part rate age pensioner who runs a small business. She's earns an average of $1,000 a fortnight. Her assets are below the pension asset test free area. As Nisha's income from self-employment is now eligible for the work bonus, the first $300 of her income will be excluded from the pension income test and Nisha will receive a higher part rate age pension. Her pension will increase by $150 a fortnight. A personal exertion test will apply to ensure that the work bonus is only available to self-employed people who earn income from an engagement in gainful work, not those who receive income through financial or real estate investment businesses.

Overall, the changes to the work bonus will increase the payments of about 88,750 social security pensioners and 1,000 allowance recipients from 1 July 2019. Approximately 1,150 people will become eligible for a social security pension for the first time. Approximately 3,000 Veterans' Affairs pensioners will also benefit. The changes to the work bonus are estimated to cost $227.4 million over four years.

The bill also expands the Pension Loans Scheme. The Pension Loans Scheme is currently available through Centrelink to part rate pensioners and some self-funded retirees who own real estate. Under this scheme, a person of age pension age can nominate an amount up to the equivalent of the full rate of the pension, with the payments accruing as a debt secured against real estate owned by the person. The debt accrues interest at a low market-related interest rate, currently 5.25 per cent. Safeguards ensure the amount of the maximum loan that can accrue is limited. The debt is either repaid if the property securing the loan is sold, or recovered from the person's estate. The scheme is voluntary and can be withdrawn from at any time.

From 1 July 2019, the Pension Loans Scheme will be expanded. The available Pension Loans Scheme fortnightly loan plus pension amount will increase to 150 per cent of the maximum rate of fortnightly age pension, including the pension and energy supplements, and rent assistance where applicable. This will allow, for the first time, maximum rate pensioners with securable real estate in Australia to receive a loan. Previous rules preventing some self-funded retirees from participating in the scheme will also be removed. The change will also allow existing Pension Loans Scheme recipients to increase their existing pension plus loan amount up to the new threshold of 150 per cent of the maximum fortnightly rate of pension. As with the existing scheme, the debt is either repaid when the secured property is sold or recovered from the estate. Existing safeguards limiting the maximum loan amount will also remain.

These changes will give older Australians more choice to draw on the equity in their homes to support their standard of living in retirement. Full rate pensioners will be able to increase their income by up to $11,912 for singles, or $17,958 couples combined, per year based on the current rates of pension by unlocking the equity in their home.

Currently there are around 1.8 million age pension recipients who own their own home, this includes around 1.1 million maximum rate age pensioners who are unable to access the existing Pension Loans Scheme. Around 6,000 eligible pensioners of age pension age are expected to take up a loan under the expanded scheme over the next three years.

For example, consider Bob and Sue, a 70-year-old maximum rate pensioner couple with a house valued at $850,000. Their combined age pension income is currently $1,381.40 per fortnight or $35,916 per year. Under the expanded Pension Loans Scheme Bob and Sue are now able to access some of the value in their home. They choose to receive $2,072.10 per fortnight or $53,875 per year, the full amount of 150 per cent of the maximum rate of the age pension. This means that Bob and Sue receive an additional $694.70 per fortnight or $17,958.20 per year in income. The value of the additional pension increases over time in line with pension indexation.

Over the next 20 years Bob and Sue receive additional pension payments under the Pension Loans Scheme at an interest rate of 5.25 per cent. After 20 years Bob and Sue sell the house for $1.6 million, while the balance of the Pension Loans Scheme loan owed to the government has grown to $900,000. Bob and Sue pay out this balance from the sale proceeds and retain $700,000. Over the 20 years Bob and Sue receive around $500,000 in additional income to support their standard of living in retirement.

The changes to the Pension Loans Scheme are estimated to cost $11 million over the forward estimates. Key stakeholders across the retirement income sector and peak bodies representing seniors have supported these three measures. The Council on the Ageing has noted they are a welcome range of measures to improve the standard of living of older Australians.

The bill also includes technical amendments to confirm that income support recipients of age pension age qualify for the employment nil rate period. The employment nil rate period arrangements play an important role in encouraging age pensioners to engage in the workforce. They enable a person whose pension payment is not payable, due to employment income, to remain connected to the pension system for a 12-week period. During this period the person retains their concession cards and can immediately return to the pension if their work ceases without needing to submit a new claim or be subject to applicable waiting periods.

In conclusion, this bill affirms our Liberal-National government's commitment to older Australians by giving retirees greater choice and flexibility when it comes to managing their finances in retirement. It will support home owning retirees to receive more income in the form of a loan, and it will allow older Australians to keep more of their pension when they work.

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