New Income stream products - now permitted

From 1 July 2017 new types of income stream products can be issued.  The new types of income stream products are lifetime products.  The mandatory features of the new lifetime income stream products are set out in SIS Reg 1.06A.  This regulation has been intentionally drafted to specify the mandatory features of these products without specify the form of the product.  Consequently, the new lifetime income stream products could be a pension (issued by a super fund) or an annuity (issued by a life office); they could be immediately payable or deferred; they could have fixed periodic payments or payments linked to investment performance and, they can be purchased by a single amount or by two or more instalments.  However, these products cannot (subject to one exception) be provided by superannuation funds with less than 50 members (such as self managed superannuation funds).

The new income stream products differ significantly from allocated pensions.  First, they are lifetime products – they are intended to pay a pension for the lifetime of the investor.  Allocated pensions are not lifetime products and the pension balance may be exhausted during the lifetime of the investor.  

Secondly, the new income stream products are not subject to the minimum payment rule (paying a minimum of 4% of the account balance which minimum increases with the age of the investor).  The new income stream products are instead subject to a requirement that investment earnings not be unreasonably deferred

Additionally, the new types of income stream products have restricted capital access rules unlike allocated pensions.  Capital access in this context means that the amount payable on the investor exiting the product (whether by death or otherwise) will be restricted and may even could be zero.  In short, the investor in a lifetime product does not have full access to the underlying capital supporting the product.  By contrast, an investor in an allocated pension always has full and unrestricted access to the capital supporting the allocated pension.

In short, the lifetime payment guarantee is provided at the expense of full access to capital supporting the product.  In contrast, allocated pensions have no lifetime guarantee but have full access to the capital supporting the pension.

Why introduce new income stream products?

There is one answer – to address the longevity risk of allocated pensions (ie the risk that the allocated pension account balance may be exhausted within the lifetime of the investor).  As these products are lifetime products – the income stream paid by the product will be payable for the life of the investor.