12 April 2016

Kiwis need options to make their money last as long as they do.

More withdrawals, lower balances, and more worry over whether your money will last. So what can the financial industry do to help?


Congratulations you've made it to age 65. Retirement beckons and freedom is at your fingertips.  

You've applied for the government superannuation and fluffed the feathers around your nest egg. Now what?  

For most retirees, the financial decisions involve a cobbled together gymnastic routine that goes something like this:  

1. Gee whiz, was that my first super payment? Whoops, it's gone.

2. Baton down the hatches, we're in turmoil.  Cancel subscriptions, start buying home-brands, stop the Camembert and start on Colby.  Get a cheaper phone plan and analyse every household bill while hyperventilating.  

3. Breathing calms, bills are reduced. Re-fluff the nest-egg and wonder how long it will last. 

4. Get brave. Withdraw a lump sum and go on a major holiday. It's what everyone else is doing.

5. Return from holiday and repeat steps two and three.

The gymnastics can be quite stressful. We do the maths and overweight capital withdrawals towards our healthier years. Then we pray we'll be happy on less money in our 80s and don't live until the financially-awkward age of 90.

We withdraw capital, we wince. It must be used as income, but watching the depletion is painful after a lifetime of feathering the nest. More withdrawals, lower balances, more worry over whether it will last. Our ad-hoc method of re-balancing creates a constant tension. What can the financial industry do to help?

Arise the modern annuity

You've probably heard of the nasty word "annuity". Promptly forget it.  

They're a dust-covered financial relic.  Innovation has arrived with a smarter way of creating income for life.  In fact this new method seems so different from the old dinosaur, even referring to it as a '"modern annuity" feels like blasphemy. 

So far in New Zealand, only one company has come to market and unsurprisingly called itself Lifetime Retirement Income.  Watch this space though.  With the ballooning of KiwiSaver balances, more will evolve, either through competition or developing their own brands with the help of this original provider.  Lifetime is being run by a previous chief executive of AXA insurance, Ralph Stewart, so there's plenty of experience behind the firm.   

As it says on the tin, the Lifetime Income Fund will take your pot of savings and turn it into a fixed income for life.  But the real magic is the ability to make lump-sum withdrawals of up to 20 per cent and pass on the balance as an inheritance when you die.  Out-live the balance of your fund and an insurance policy kicks in to keep paying a fixed income.  

In summary, the solution gives insured fixed income plus withdrawals plus inheritance benefits.  

How do they do it?

Embedded in the fund is an insurance premium of 1.35 per cent of your funds value each year. It is called "longevity" insurance and is a simple bet on your age at death.  

The insurer behind the policy is Lifetime Income Ltd (part of the same group).  They've had to set up from scratch and obtain regulatory approval from the Reserve Bank.  At the moment their credit rating is B- (fair).   In the investment world that rating wouldn't be flash, but it isn't under-pinning an investment.  It's just underpinning the ability to keep paying income if your fund runs dry due to your ripe old age.  Given the newness of the insurer the rating isn't a surprise and would be expected to strengthen with growth.

Tracking your money

Your lump sum (minimum investment $100,000) is actually invested in a low cost tracker fund with Vanguard, a massive funds management firm with $4.4 trillion under management around the world.  Another consultancy company, Milliman, provide risk management services (using the futures market) to limit fluctuations.  You can decide to invest in the fund for a number of years before taking any income.  It has the benefit of investment gains being locked in, even if the market falls (known as an escalator fund).  

The problem with the old annuity relics from the past was their lack of flexibility. Once your money was turned into income you couldn't get any capital back and if you dropped dead, it all went up in smoke and you lost the remaining balance. 

This new type of retirement income solution is elegant in its simplicity and flexibility.  No more wincing at withdrawals, the income just arrives in your account in a planned fashion.  No more worry about living until age 90.  The income continues for life.



The Opinion Article was written by Janine Starks* and was published in the Dominion Post and The Press on 16 April 2016.

Read the full article here.

*Janine Starks is a financial commentator with expertise in banking, personal finance and funds management.  Opinions in this column represent her personal views.  They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product.  Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.