Encouraging superannuation income streams with tax-free earnings to be taken in a form that provides longevity insurance

Australia’s superannuation system allows those entering retirement to take their benefits in the form of an income stream which benefits from tax-free earnings. Currently, very few income stream benefits are taken in the form of a lifetime annuity even though such an instrument provides an excellent form of longevity insurance. The Australian Government is currently implementing changes that expand the tax-free earnings net to include Deferred Life Annuities and Group Self-Annuitisation Schemes. This paper finds that this is a positive move that will potentially benefit many retirees. The government is also considering implementing some behavioural tools which include a regime under which superannuation trustees choose a pre- packaged bundle of income stream products that include annuities. Members entering retirement would actively choose to adopt these products. It is argued that such a regime would be a negative policy development that would result in many retirees annuitising to a non-optimal extent.