Income stream overview
What is an income stream?
An income stream is essentially a method of turning a lump sum of money (including your super and non-super funds) into a source of regular income. Income streams have become increasingly popular with retirees, because as well as providing a regular income, they can also provide tax advantages and a better social security outcome.
Income streams are generally available as either pensions or annuities. The main difference between a pension and an annuity is the provider.
• Pensions are generally provided by superannuation funds. As such, they are usually only purchased with accumulated superannuation monies.
• Annuities are usually provided by life insurance offices or friendly societies. They can be purchased with accumulated superannuation monies, or with nonsuperannuation (ordinary) monies.
Types of income streams
There are four main kinds of income stream available.
- Account based. Account based income streams can only be purchased with superannuation monies. Each year you are required to take a minimum payment which is based on your age at commencement and at each subsequent 1 July. No maximum income limit applies unless it is a Transition to retirement (TTR) income stream where a maximum of 10% of the account balance (calculated each 1 July) applies. Your money is invested for you, and lasts as long as there is money left in your account.
- Non-Account Based. As the name suggests a non account based income stream is one to which there is no account balance attributable to you. These are generally fixed term and lifetime pensions and annuities.
- Fixed term. As the name suggests, the term is fixed according to your life expectancy and the income level (subject to indexation) is also fixed at commencement.
- Lifetime. These income streams last as long as you do. As with the fixed term, the income level is preagreed. Unlike the others, the income is guaranteed for your lifetime — no matter what investment returns are generated and no matter whether you outlive your life expectancy.
- Asset test exempt. These income streams allow the recipient favourable social security treatment under the asset test. These were only available until 19 September 2007 and came in the form of lifetime, fixed term and market-linked income streams. Asset test exempt income streams may, subject to meeting certain conditions, be purchased from 20 September 2007 from the commutation of existing asset test exempt income streams.
- Market Linked. Market Linked income streams can only be purchased with superannuation monies. The term is fixed at commencement and the income level can vary from plus or minus 10% around the annual calculated amount. Public offer superannuation funds offered these types of income streams up to 19 September 2007. They may, subject to meeting certain conditions, still be purchased from public offer superannuation funds from the commutation of existing Market Linked pensions and complying fixed term pensions/annuities. It is also possible for a self managed superannuation fund to issue this type of income stream. Each of these types of income stream have their relative merits and special features.
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