Australians have access to a range of products, which they can mix in various combinations to meet their retirement income needs. Some of these products are defined in government legislation and provide for a range of taxation benefits. While income streams are not mandatory the government created a range of incentives to encourage people to take up these products. The overall policy objective of retirement income streams has been to facilitate capital drawdown over the whole of retirement and target concessions to ensure an adequate replacement rate and overall equity. According to Stanhope (2004) the age pension asset test exemption rules are the main incentive rules affecting retiree choice of retirement income products. By investing in assets which receive the exemption, many individuals, particularly those with assets between $150,000 and $350,000 (for singles), gain much greater access to the age pension.

The main types of income streams are described below. This part of paper outlines the position prior to the end of June 2007. On 1 July 2007 the government introduced significant changes to the tax treatment of superannuation and a simplification of the rules applying to some of these products. These changes are outlined in Section 4.

# **3.1 Allocated income streams**

Allocated income streams are the most popular method by which superannuation fund members take income streams, representing more than 80 percent of all money invested in income streams. They are account-based schemes which involve an investment account within a relevant fund or financial provider. This means that investment risk is borne solely by the purchaser. The investment account balance increases as investment earnings are added and decreases as regular income payments are made. Most allocated income streams offer a range of investment choices. Regulations require that payments must occur at least annually and are subject to minimum and maximum amounts to ensure that a mixture of income and capital is drawn down over a period of time approximating a person’s life expectancy (these regulations are updated 1 July each year). The variance between the minimum and maximums are quite large and a person choosing the maximum could face sharply declining income as they age.

There are two types of allocated income streams—allocated pensions and allocated annuities. An allocated pension is a series of regular payments, comprising capital and earnings, payable directly from money held in a personal account with a superannuation fund including a self-managed superannuation fund. An allocated annuity provides payments comprising capital and earnings under a contract issued by a life insurance company. An allocated income stream can only be created with money that is within a superannuation fund and certain types of lump sum payments made to an employee on termination of employment.

Survey data indicate that just under a quarter of pensioners draw the minimum pension and less than 10 percent draw the maximum pension. Overall it appears that the tendency is for pensioners to take lower pensions reflecting desire to preserve capital. This view about conservatism is supported by data that indicates that the vast majority of pensioners seek little or no increases in the annual pension they are drawing, preferring instead to preserve capital and experience declines in the real value of their pensions.

Allocated income streams provide considerable flexibility. A person typically has access to the funds in their investment account and they are able to withdraw all or part at any time, but with possible tax implications.

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