There's no longer a need to gamble on retirement

Last week, I wrote a cheque for $100,000. It was a strange experience. Partly because it has been a long while since I wrote a cheque (such a clunky form of money exchange) but also because I was, in a fashion, writing the cheque to myself, as I am a Director and minor shareholder of the recipient company.

You may have guessed that the $100,000 was for an investment. The cheque went to Lifetime Income, a company that has just started to offer a new, for New Zealand, investment product called a variable annuity.

This is a new, much-improved style of annuity – an investment product that gives income to retired people. These are very popular internationally (e.g. US, UK, Australia and Japan) and now they are offered in New Zealand.

To explain a variable annuity, we have to start with the old annuities. Annuities have been around for centuries although they were never popular in New Zealand. Essentially an annuity means the investor gives the annuity provider a lump sum (say, $100,000 although it could be more) and the provider then gives the investor a guaranteed income for life.

That was not a bad deal for someone who needed a certain amount of income. They were especially useful for retired people who had cashed up their super policies or sold a business to retire and need to convert the lump sum into a regular income for life.

However, these old style annuities were something of a gamble between the investor and the company providing the annuity. If you lived longer than normal life expectancy, you would win on the deal because you keep getting income payments; if you lived less than most the provider stopped paying and kept the lump sum.

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Once the investor had handed over the money, the annuity could not be varied. Investors got the income for life regardless of that being short or long. On death (whether that came sooner or later) the annuity provider kept all the money that had been paid up front.

Of course, on average, the annuity provider had the numbers worked out: actuaries knew life expectancy figures and paid an income based on those figures. Some people would live long and others only a short time.

There was the famous case of a French woman with an annuity who lived to 122 years. She won on the deal but for every one like her, there has to be someone who died shortly after their money was handed over.

Those who lived only a short time were ripped off because they died and did not get the years of income they expected.

The new variable annuities are more flexible. They can be varied at any time, you can draw a lump sum from them and, if you do die early, the estate is paid the capital that is left. I am still a long way from retirement but when I do retire, I will have a guaranteed income for the rest of my life of at least $5,000 per annum from my $100,000 (i.e. 5 per cent). It could be more than 5 per cent depending on when I choose to start the income. The 5 per cent (or more) that is paid includes a part of the capital so that the capital does gradually reduce over time.

The account will probably be down to zero when I am 80-85 years but, because there is life insurance with the annuity, the income continues for as long as I live.

Before the account gets to zero, if I need to draw some capital from the annuity, I can do that. Unlike the old annuities, these are not a gamble between myself and the provider, with one of us a winner and one a loser depending on how long I survive. Instead, retired people can make an investment that gives them steady, reliable income and, in the early days at least, be able to draw on the capital if they need it.

Martin Hawes is a director and shareholder of Lifetime Income. Martin Hawes is an Authorised Financial Adviser and his disclosure statement is available free of charge at www.martinhawes.com. This article is of a general nature and no substitute for personalised financial advice.

This article was published in the Sunday Star Times on Sunday 29 May 2016.

The original article can be read here.