Changes to the tax treatment of deferred lifetime annuities (DLAs), announced as part of the federal government’s proposed new superannuation policy, would significantly impact the life product market and present benefits for retirees, says Towers Watson.
Describing the proposal as a “watershed moment for the Australian superannuation industry”, Towers Watson Australia’s managing director, Andrew Boal, said DLAs – a particular longevity insurance product – help alleviate retirement and longevity risk.
“We believe that this is a key reform for retirees in Australia,” he said. “Towers Watson, along with some industry and professional bodies such as the Actuaries Institute, has advocated this change because of the growing importance of retirement risks.
“Essentially, a deferred lifetime annuity pays a guaranteed income stream for the rest of the holder’s life no matter how long they live, and it can also be indexed for inflation.
“It is an insurance policy that protects against the longevity risk, with payments commencing at the end of the deferral period – at say age 85 or 90,” Mr Boal said.
Should the proposals be passed once parliament resumes, DLAs will be subject to the same concessional tax treatment that superannuation assets supporting income streams will receive from 1 July 2014.
However, while the proposal would improve the outlook for the annuity market, Mr Boal said further legislative amendments are required to truly provide benefits to retirees.
“Australians have been reluctant to commit a high proportion of their retirement savings to the other annuity products already available where payment begins immediately on retirement, although this is changing as the importance of longevity risk gradually becomes clearer,” he said.
“The success of DLAs will depend not only on the announced tax concession, but there are a number of other regulatory changes required that we have also been discussing with government.”
Mr Boal called on the wider super industry to educate members and retirees about the benefits of allocation to DLAs.
