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One of the findings of the government’s Retirement Income Review was that many retirees are reluctant to withdraw more than the mandated minimum amount of income from their super pension out of a fear that their money will run out.
It’s not an unjustified fear, especially at a time of highly volatile investment markets. The Investment Trends 2022 Retirement Income Report found non-retirees expect their income in retirement to be $3,200 per month on average but think they will need closer to $4,300 per month on average to live comfortably. Not surprisingly, 47% expect to outlive their retirement savings.
And there’s the rub. To paraphrase Dickens: a long life, diminishing savings, result misery. A long life, guaranteed income for life, result happiness.
These sentiments have not been lost on the big super funds. From 1 July 2022, funds are obliged to publish their retirement income strategy on their website under the terms of the government’s Retirement Income Covenant. This has removed a roadblock to the development of so-called longevity products designed to provide regular retirement income for life. Progress is slow but some innovative lifetime income products are beginning to hit the market.
What are longevity products?
Longevity products are different to the account-based super pensions commonly offered by super funds.
“Longevity products give people the confidence to draw down income from their super and have a better standard of living now with the confidence that if they do live to quite an advanced age there’s still going to be money coming in,” says Ian Fryer, general manager at super research house Chant West.
Where do longevity products fit in?
It’s generally suggested that longevity products work best alongside an account-based pension and the Age Pension, rather than as a standalone retirement income solution.
While a full or part Age Pension should cover some of the basic costs of daily living, allocating some of your retirement savings to a longevity product or annuity gives the added peace of mind that comes from knowing you will always be able to cover the essentials.
The remainder of your retirement savings can then be allocated to an account-based pension or self-managed investments to pay for discretionary spending. In the early active years of retirement, this might include travel, eating out and more expensive leisure activities.
Who do they suit?
Despite the appeal of a guaranteed income for life, longevity products are not for everyone.
People with less than $100,000 in super at retirement are more likely to withdraw it as a lump sum, to repay debts, buy a car or campervan, or carry out home maintenance. At the other end of the income scale, wealthy people already have enough assets to support their retirement lifestyle into a ripe old age.
A 2019 report by Lonsec on The Role of Annuities in Retirement Portfolios suggested that it’s the middle group of retirees with savings between $250,000 and $1.5 million who are most likely to benefit from a retirement product. These aren’t hard and fast cut-offs, but simply a rough guide. Everyone needs to work out their own retirement income needs and how best to meet them.
So what longevity products are currently on offer from superannuation funds? It’s a small but growing field.
What’s on offer?
While all big super funds are aware of the need for retirement products that address the need for an income for life, the availability of such products is patchy at best.
According to the Australian Prudential Regulation Authority (APRA), in June 2022 annuities accounted for just $318 million of member retirement assets out of a total $362 billion. There are two longstanding commercial providers of annuities in Australia: Challenger and AIA, with Challenger the clear market leader. A third provider – investment bond specialist, Generation Life – has also entered the market (see below).
Most retail super platforms have some sort of annuity on their platform, mostly a rebadged Challenger or AIA product. CFS FirstChoice, Netwealth, BT Panorama and HUB 24 all offer rebadged annuities.
But innovation is happening. Traditional annuities generally invest in conservative fixed-interest investments with payments indexed to inflation, the Reserve Bank cash rate or fixed for life. But a new breed of products combines income for life with market-linked investments, with the potential to generate higher income when markets rise and less when they fall. While markets can be volatile, in the long run payments should rise.
New products include:
- Challenger’s Liquid Lifetime Annuity (market-linked payments), which offers five indexed options – cash, conservative, conservative balanced, balanced and growth, with the flexibility to switch investment option annually.
- AMP’s MyNorth Lifetime suite of products that combine income for life with a choice of hundreds of investments available on the MyNorth platform.
- Generation Life’s first annuity-style product, LifeIncome in partnership with Optimum Pensions. As the name suggests, LifeIncome offers income for life combined with the flexibility to select and switch between market-linked investment options. At present it is a standalone product but there are plans to partner with super funds to make the product available to their members directly or as a white label option tailored to their membership’s needs.
As these are complex products, all are initially available from an adviser only. Fryer believes this is a smart move as most people will need help to work out if the product is for them, how much to invest and how it might fit in with their overall retirement income plan.
Some industry funds also offer annuity-style pensions. For example, UniSuper’s Commercial Rate Indexed Pension (CRIP) provides income for life, adjusted for inflation. There’s a guaranteed minimum payment period of ten years or your life expectancy, whichever is the shorter. If you die within this period, the residual amount will be paid out to your legal representative.
However, it was the launch of QSuper’s Lifetime Pension in March 2021 that raised the bar for longevity products and may have inspired some of the newer offerings listed above. (QSuper merged with SunSuper in 2022 to form Australian Retirement Trust, but the QSuper name has been retained on its Lifetime Pension for now.) It was the first to combine income for life with an allocation to growth assets to allow the income payments to grow over time. QSuper Lifetime Pension won ChantWest’s 2022 award for best longevity product.
Worked example
Walter is aged 67, single, owns his home and plans to retire next year. He has $550,000 in super and $75,000 in other assets, such as his car and household contents. He has no other sources of income.
As he has total assets of $625,000, he would ordinarily not receive any Age Pension. However, Walter has decided to purchase a QSuper Lifetime Pension for $250,000 and open a traditional account-based pension with the remaining $300,000.
As the Lifetime Pension purchase amount is assessed for the Age Pension assets test at 60% of the purchase price, this will result in a lower assessable asset value. Walter will not only receive fortnightly payments for the rest of his life, he is now also eligible for the Age Pension and the much-prized Commonwealth Pensioner Concession Card.
Walter’s total income before and after the purchase of a QSuper Lifetime Pension
Current plan | New plan | |
---|---|---|
Initial funds | ||
Account-based pension balance | $550,000 | $300,000 |
Lifetime Pension purchase price | Nil | $250,000 |
Total | $550,000 | $550,000 |
Income sources | ||
Account-based pension | $27,500 | $15,000* |
Lifetime Pension | Nil | $17,508** |
Age Pension | Nil | $5,827*** |
Total yearly income | $27,500 | $38,335 |
Source: QSuper
- *Income based on withdrawal rate of 5%
- **Payments based on 2022–23 financial year, single option
- ***Age Pension income estate based on income and assets tests as at 20 March 2022.
As a result of the reduction in assessable assets, Walter’s Age Pension entitlement has increased from nil to $5,827, and his total annual income has increased by $10,835.
For an estimate of how much retirement income you could earn with a longevity product, or a combination of an account-based pension and a longevity product, try out the QSuper calculator and/or the Challenger Retire with Confidence Tool. As the design of the products differs, the annual retirement income for the same initial outlay will also be different.
The outlook for longevity products
Ian Fryer expects other funds will follow the QSuper approach, but there will be a lot of variety in what funds do in terms of implementation. For example, he says there may be differences in growth assets or guarantees around what happens if you die prematurely.
It has long been recognised that super funds need to pay more attention to the retirement phase of super after decades of focus on the accumulation phase. And there is unquestionably pent-up demand from retirees for pension products that offer the certainty of knowing that their money won’t run out.
That’s the carrot. Until recently there’s been no regulatory stick but that changed with the introduction of the Retirement Income Covenant. First proposed in 2018 and finally coming into force in July 2022, it requires trustees to consider the needs and preferences of members and ensure retirees have greater choice in how they withdraw their super benefits in retirement.
However, that doesn’t necessarily mean all super funds will launch their own lifetime pension. Fryer says the retirement income strategy doesn’t require them to have a longevity product. Instead, they could achieve their objective with advice to help members make the most of their account-based pension.
Interestingly, the Investment Trends research found the requirement for funds to publish their retirement income strategy appears to be delivering results. Super funds remain the most used source of information (63%), followed by financial advisers (33%).
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