Treasury has accepted that tax rules for some annuity products are hindering their development, especially those dealing with longevity risk.

“While we are satisfied that the current rules are achieving the desired objective for account-based pensions, they do not allow access to the tax exemption for some types of product that could help individuals to better manage longevity risk,” it says in a report on retirement income streams.

These products include deferred annuities that pay income every year and pooled products in which income varies due to investment returns and mortality.

“This has hindered the development of these products, as noted in the Financial System Inquiry report,” Treasury says. “The ‘comprehensive income product for retirement’ that the inquiry discusses would depend on these pooled annuity-type products being developed.”

Submissions to a Treasury inquiry into retirement incomes argue current regulations are a barrier to innovation in annuities.

The report says: “The key regulatory impediments to the development of these types of retirement income products are the requirement to pay an amount of income each year. This prohibits products that defer income until a particular time.

“[Also] the requirement for non-account-based products to provide payments that do not vary from year to year other than to increase in line with the same percentage factor, movements in consumer price index or average wages. This can rule out products that involve risk-sharing because that would usually involve payments that fluctuate in line with investment and mortality experience.”

Treasury says it considered replacing the rules for annuities with a more “principles-based” approach.

“The concept is appealing, but defining principles that could apply to the wide range of potential retirement income products would be difficult,” the report says.

“As such, this approach is not supported.”

Treasury says it has developed a way to extend concessional tax treatment for deferred annuities and pooled products.

“Products with more flexible payment structures would be able to qualify for the earnings tax concession provided they complied with a diminishing capital access schedule.

“The schedule would be in addition to and operate as an alternative to the existing minimum payment rules.”

Treasury recommends an additional set of income stream rules should be developed to let deferred annuities access tax benefits while meeting the declining capital schedule.