This Federal Budget confirmed the pre-announced changes to remove the inequitable tax treatment of deferred lifetime annuities and give them the same tax treatment as current income streams.

The government also announced a new pilot scheme to allow senior Australians to downsize their home without reducing their Age Pension if the home has been owned for at least 25 years. Amounts up to $200,000 can be deposited into a separate account which will be an exempt asset for up to 10 years.

In response Actuaries Institute CEO Melinda Howes said; “We were encouraged by the confirmation of more favourable tax treatment of deferred lifetime annuities, which will provide retirees with the ability to insure their longevity in a more cost effective way.

“The new announcement allowing the downsizing of a retiree’s home without reducing Age Pension is a sensible initiative which will assist the current generation of retirees who didn’t have compulsory super for their whole working lifetimes, and for many of whom the family home is their main retirement asset.

“Actuaries play a unique role in business and society through their ability to assess risks through long-term analyses, modelling and scenario planning,” she said.

One of the key risks identified by the Institute is ‘longevity risk’ – the risk of people outliving their retirement savings. In September 2012 the Institute released the white paper “Australia’s Longevity Tsunami, what should we do?”, which emphasised the need for retirement policy reform in the face of Australia’s steep and continuing rise in life expectancies.

Ms Howes said underestimating life expectancy will have major implications for retirement incomes policy, which must take into account individual financial security as well as the economy-wide costs of providing for an ageing population.

“There is an urgency of the situation we are facing – we don’t have years to reform the system – the current generation of workers need better retirement product solutions now. The current system and most people’s own planning do not take into account how long the current generation of Australian workers will live,” Ms Howes said.

“It was encouraging to see the budget remove one of the key roadblocks to developing better post-retirement products by changing the tax laws on deferred lifetime annuities (which are essentially longevity insurance). We look forward to continuing to work with policymakers to ensure the way is cleared for innovative products to be developed to assist our increasing number of retirees to manage their retirement risks.”

“While this move is encouraging, the government and financial services industry need to better educate consumers about the role deferred lifetime annuities, and indeed, other longevity / mortality pooled products, can play in securing an adequate retirement income in extreme old age. It’s all about how the product is presented to you – At the moment many Australians view annuities as expensive as they do not realise how long they will live.”

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