Mr PYNE (Parliamentary Secretary to the Minister for Family and Community Services) (9:49 AM) —I move:

This bill gives effect to two measures announced earlier this year in the government's statement `A more flexible and adaptable retirement income system'. These measures change the social security and veterans' affairs means test assessments of income streams to:

provide a 50 per cent assets test exemption for a new product, `market-linked income streams', from 20 September 2004; and

change the available assets test exemption from 100 per cent to 50 per cent for certain non-commutable income streams purchased from 20 September 2004.

The bill also contains amendments to align the characteristics of life expectancy income streams with those of the new market-linked income stream product and a variation to the guarantee period for assets test exempt lifetime income streams.

Social security pension and allowance payments are intended for people who, because of age, disability, unemployment, or caring responsibilities, are unable to adequately support themselves. Social security payments are targeted to those most in need through the assets and income tests. These are collectively known as `the means test'. The means test is the fairest way to ensure that the limited taxpayer funds available for social security expenditure go to those in greatest need.

The assets test is based on the principle that people with substantial assets apart from their home should use those assets either directly or to produce income to meet day-to-day living expenses before calling upon community resources for income support through the social security system. In order to encourage customers to maximise their private income from employment or investments, an `income free area' is allowed before income starts to affect social security payments.

At present, income streams that meet certain criteria are assets test exempt for the purposes of the means test. This means that the asset value of the income stream is not taken into account when determining a person's eligibility for a social security payment.

In addition, this bill will:

extend assets test exempt status for a new product, `market-linked income streams', from 20 September 2004. This product will offer market returns but the purchaser will not be able to withdraw his or her capital before the term of the product has ended—so it therefore is non-commutable; and

change the social security assets test exemption from 100 per cent to 50 per cent for non-commutable income streams that are purchased from 20 September 2004 and meet the requirements for exemption from the assets test.

The extension of assets test exempt status to the new `market linked income streams' is intended to increase competition in the provision of income stream products. Customers will also benefit from having greater choice in selecting an income stream that best meets their retirement needs.

Currently, insurance based income streams are given concessional tax and social security treatment because they provide stable income payments over a guaranteed period. Consumers can only select a product that offers a guaranteed but generally low return. This new product will offer potentially higher but more variable market returns. As with current income streams that receive concessional treatment under the assets test, the purchaser will not be able to withdraw his or her capital before the term of the product has ended.

The change in the assets test exemption from 100 per cent to 50 per cent for `purchased' assets test exempt income streams is intended to ensure that the age pension is paid to those who need it most. Despite the change, a 50 per cent exemption retains a significant incentive for individuals to purchase income streams. Even after the commencement of this legislation, it will be possible for couples to invest up to $900,000 in a complying income stream and still receive some age pension.

All assets test exempt income streams purchased before 20 September 2004 will continue to receive a 100 per cent assets test exemption. This means that no current customers will be affected by this change.

The bill also contains provisions to align the characteristics of life expectancy income stream products with those of the new market-linked income stream products. The alignment will ensure that these products are treated in a consistent manner under the means test. This will allow individuals to compare the products based on their characteristics and not the short term differences between the expected annual payments.

The bill also extends the guarantee period for assets test exempt lifetime income streams. The current means test rules stipulate that an assets test exempt lifetime income stream may only be commuted if the primary beneficiary dies within a 10-year period of purchasing the income stream. The bill will extend this period to allow a lifetime income stream to be commuted provided that the primary beneficiary dies within a period equal to his or her life expectancy or within 20 years of purchasing the income stream, whichever is the lesser.

I commend the bill to the House, and I present the explanatory memorandum.

Debate (on motion by Mr Rudd) adjourned.