14 June 2017
Are Lifetime's income payments protected from inflation?
Inflation reduces the value of a fixed income payment over time. We all remember the cost of many goods and services being less that what they are now.
Lifetime can offer you an inflation-protected income for life option which increases each year in line with New Zealand Superannuation. This is done on a quote basis and the net income rate is typically around 25% lower than Lifetime's standard net income rates. For example, this would be around 3.75% p.a. (after fees and tax) for a 65-year-old instead of 5.00% p.a. (after fees and tax).
You therefore receive less income today but get increasingly more income in the future. However, in the current low inflation environment, we expect the average investor to be better off by choosing a non-inflation protected product.
Inflation has been steady and reasonably low for quite some time. According to the Reserve Bank of New Zealand, the compound average annual rate of inflation over the last 30 years has been 2.30% per annum. You can see this data here.
Most retirees tend to also spend more in early retirement than in later years, even taking into account greater spending on healthcare when they're older. You can read more on this here.
So what should you do? In this example below, we illustrate the difference between choosing an indexed or non-indexed product:
*Inflation Protected product increases each year by an assumed long run CPI inflation rate of 2.30% per annum.
Your income rises each year with the indexed product but it’s expected to take 13 years before it overtakes the non-indexed product.
Lifetime is designed to help you top up NZ Super to help you meet fortnightly living costs. NZ Super is indexed at 66% of the average wage (which tends to rise faster than CPI inflation) and will likely make up the a significant proportion of your retirement income. This means a large amount of your income is indexed (via NZ Super) anyway so the need to find inflation protection elsewhere is lessened.
Higher inflation tends to increase investment returns and interest rates. Although your income rate may be fixed, you will capture these higher returns in the form of increased returns from the balanced fund your money is invested in.
Your investment with Lifetime is always liquid, which simply means your initial investment plus net investment returns minus income payments received can be redeemed at any time.
If inflation were to rise in the future, you have the option to add to your investment to top up your regular payments. Your income rate would also be higher as you would likely be older when this occurs. Investing in stages like this can give you a partial inflation hedge. For example, if you invested a portion of your funds at 65 you would receive a net income rate of 5.00% p.a. If you invested another portion of your funds at age 70 you would receive receive a net income rate of 5.50% p.a.
If you would like an inflation-protected income for life quote, please feel free to contact us today at email@example.com
What could your income be?
Find out using our Lifetime Income Calculator.