15 May 2018

How does Lifetime compare to a Term Deposit?

Lifetime is similar to a Term Deposit in some ways and different in others. Both investments have their benefits.

Let's start with the Term Deposit.

A Term Deposit is a good investment if you are looking for simplicity and low-risk. It is easy to invest and you can choose from a range of maturities and interest rates to suit your needs. The big 4 banks have a long history in New Zealand and solid credit ratings.

Term Deposits are not entirely without risk however. Unlike in most developed countries, term deposits in New Zealand are not insured or guaranteed. In the event of a bank failure, your money could get a 'haircut'. Read more about this on here.

As a savings investment, Term Deposits are a reliable choice. However as an income investment, they have some downsides. Interest rates fluctuate over time making it hard to get a regular income over the long term. Term Deposits also pay out interest infrequently; usually quarterly, semi-annually, or annually. This reduces cash flow and makes it harder to budget on a weekly or monthly basis. Your money is also locked in for the length of the term, meaning you cannot access your savings immediately without penalty. Lastly and importantly, once your savings in a term deposit have been fully drawn down, your income stops.

With interest rates currently so low, it's become difficult to get a meaningful income from Term Deposits. On the 10th of May 2018, the Reserve Bank announced plans to keep the Official Cash Rate steady at it's record low of 1.75% p.a. until late 2019 and said the direction of the next move is equally balanced and could be up or down.

As the Official Cash Rate directly influences interest rates in New Zealand, Term Deposit rates are set to remain low for the foreseeable future. Against this backdrop, Lifetime's net income rates of 5.00% (after fees and tax) and higher are attractive.

Now let's look at Lifetime.

Lifetime enables you to turn a lump sum into a regular income that's insured for life. Income payments are paid fortnightly and remain the same, even if markets fall.

To offer an income guarantee, the Reserve Bank requires Lifetime to set aside capital reserves to account for each and every investor. These capital reserves ensure Lifetime can honour its future obligations.

Lifetime’s income payments are paid after-tax and continue for as long as you live, even if your original capital has been drawn down to zero. 

Lifetime differs from a Term Deposit as it is primarily an income investment rather than a savings investment. Lifetime’s income payments are made up of both returns on your savings as well as capital drawdown. This means that over 20-25 years or so your regular income withdrawals may drawdown your balance entirely. However this doesn’t mean you will run out of income. Lifetime’s longevity insurance ensures you will continue to get your regular income payments, for life.

In summary, Term Deposits and Lifetime are investments that cater to different needs. Term Deposits are designed to help you save and Lifetime is designed to give you a secure income for life. Lifetime helps you address 2 basic risks that are unmet by Term Deposits. These are longevity risk (how long will you live?) and market risk (interest rates going up and down).

Reserve Bank Governor, Adrian Orr

Reserve Bank Governor, Adrian Orr

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