Comparison of different types of income stream products

The following table provides a summary of the different types of income stream products and shows how their features vary. The non-account based products in the following table are assumed to be complying products for social security purposes.
Features	Account based Income streams	Account Based Market Linked income streams¹	Non Account based Lifetime income streams²	Non Account based Fixed Term income streams³
Account based	Yes	Yes	No	No
Insurance company based	No	No	Yes	Yes
Annual income payments are guaranteed	No	No	Yes	Yes
Investment choice	Yes	Yes	No	No
Fixed term	No	Yes	No	Yes
Access to capital	Yes		No	No
Recipient can vary annual income received	Yes	Yes	No	No
Residual capital value allowed	N/A	No	No	No
Death benefit payable	Yes	Yes	Possible⁴	Yes
Asset test concession (if purchased)⁵: * pre-20 Sept 2004	N/A	N/A	100%	100%
* post- 20 Sept 2004	N/A	50%	50%	50%
Income tested	Yes	Yes	Yes	Yes

Investing in Income Streams to suit your needs

Trying to match the investment in income streams to your income needs can require some extra thought. In the 'In Real Life' cases used we assume that investment returns will be consistent over the life of the income stream, whereas in practice they generally vary each year. Also, the cases assume that where income is to increase each year, it does so in a consistent fashion. In practice, our retirement income needs will vary throughout retirement years.

Working out income needs throughout retirement is a very personal thing and it is quite difficult to generalise about income needs.

Some people take the view that they should have higher income in the earlier years of retirement when they are healthy and active. Hence, with greater activities, including travel, expenses may be higher.

Others take the view that they should try to limit living expenses in earlier years to build up capital for later in retirement and also to provide for contingencies such as health costs.

There is no right or wrong answer to this. There may be phases of retirement where your income needs will vary. What you do is to try to design your income stream investments so that the right amount of income is produced at the right times.

When we look at the different income streams from an income flexibility viewpoint we can see how the features are different.

Type of Income Stream	Income Flexibility
Account Based (Allocated)	Good flexibility with minimum income catering for a wide range of income levels. Capital will be used up more quickly if higher levels of income are taken and preserved for longer if minimum taken.
Account Based (Market Linked)	Limited income flexibility (+ 10% or - 10%) but you know that income will be payable for the term selected.
Non Account Based (Lifetime)	Very little flexibility apart from the % level of indexation of payments each year but you know that payments are payable for life.
Non Account Based (Fixed Term)	Very little income flexibility but again you know that income will be payable for the term selected. However the term selected could be shorter thereby creating higher payments for living expenses.

So if you wanted to produce a higher income in the earlier years and have a more stable but longer income in later years, you could perhaps invest in an account based allocated pension initially and switch to an account based market linked income stream later.

Alternatively, you could invest in an account based income stream now and draw income at a level closer to the minimum and use a smaller part of your money to invest in a short term fixed term income stream to provide additional funds for living expenses in the shorter term.

1. Income stream must meet requirements in s.9BA of Social Security Act 1991.
2. Income stream must meet requirements in s.9A of Social Security Act 1991.
3. Income stream must meet requirements in s.9B of Social Security Act 1991.
4. Death benefits are payable only where a guarantee period exists and all beneficiaries die within the guarantee period.
5. From 20 September 2007, all new income streams will generally be 100% assets tested

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