14 February 2018

Martin Hawes: Can you get a permanent top up to NZ Super?

According to globally-renowned Canadian retirement planning expert, Moshe Milevsky, just about all economists agree that annuities – financial products where individuals swap a lump sum of money for a guaranteed income for life – offer the best protection against outliving your money.

“That’s remarkable because you can’t get economists to agree on anything nowadays,” Milevsky told media. 

While annuities are hugely popular overseas, they haven’t really been needed in New Zealand up until now because of our previous high interest rates and our relatively generous superannuation.

To a certain extent the government pension – which currently kicks in at age 65 – fills the traditional annuity void in NZ, providing a scrape-by level of income for everyone. And if you’re one of the dwindling number of retirees eligible for an employer-guaranteed pension – known as ‘defined benefit’ schemes – then perhaps you are set for life. Congratulations. 

The vast majority of NZ retirees though, face a much more precarious journey through retirement. Many of them have filled up a savings pot through their working lives that they usually have to empty over time.

Unfortunately, retirees are missing two vital pieces of information when calculating how long that pot is likely to last: what investment return they will get; and, how long they will live.

As discussed above, these are the very problems that annuities solve so elegantly.

Prominent financial commentator, Martin Hawes

Prominent financial commentator, Martin Hawes

The lifetime annuity concept is devastatingly simple and addresses these fundamental risks - you invest a lump sum in exchange for a certain and guaranteed income for life.

Officially launched in 2015, the Lifetime Income Fund is classed as a ‘variable annuity’ and Lifetime Income is New Zealand’s largest annuity provider. Lifetime marries the main benefit of traditional annuities – i.e. a certain level of income guaranteed for life by an insurance company – with some exposure to investment market returns.

For example, while Lifetime guarantees a 65-year-old investor a lifelong net income rate of five per cent (your income rate is higher if you’re older than 65), the actual payout could be more given a portion of funds are invested in shares and bonds via a panel of reputable investment managers, namely, Vanguard, ANZ, NZX, and Harbour Asset Management.

Unlike NZ Super, Lifetime has the additional feature of allowing capital to be withdrawn at any time with any balance paid to the estate.

Setting a non-negotiable income buffer for life has a number of other positive side-effects.

For example, locking in a certain lifetime income (say, to cover all living expenses) can free you up to pursue more growth-oriented investment strategies with any surplus assets.

Furthermore, the prospect of a guaranteed income certainly softens the blow of any investment market volatility, which has returned with a vengeance in 2018.

Indeed, despite his technical bent Milevsky rated the psychological comforts offered by lifetime annuities as one of their most valuable features. 

“As a rational economist, sometimes it’s hard to use terms like peace of mind and satisfaction, because they are not easy to quantify,” he said. “But there’s growing behavioural evidence that this is something people value.”

Retirement expert, Moshe Milevsky

Retirement expert, Moshe Milevsky

Martin Hawes is an authorized financial adviser and an independent director of Lifetime Retirement Income. Lifetime Retirement Income is managed by Lifetime Asset Management Ltd.

What could your income be?