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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. In a National Seniors survey in 2018, almost 25% of retirees aged 75–79 said their savings had run out, while almost one third of those over 80 said their savings were gone.
Concerns about their savings lasting the distance is widespread among retirees. ‘Having an income that lasts for life’ was rated as very important by 80% of those surveyed; only ‘having a regular and constant income’ rated higher (84%).
And there’s the rub. To paraphrase Dickens: a long life, diminishing super, result misery. A long life, guaranteed income for life, result happiness.
These sentiments have not been lost on the big super funds who are belatedly developing so-called longevity products designed to provide regular retirement income for life.
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.
While a full or part Age pension may 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.
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, in 2018 annuities accounted for just 12% of total pension payments in Australia. There are just two commercial providers of annuities in Australia: Challenger and AIA, with Challenger the clear market leader.
Most retail super wraps have some sort of annuity on their platform, mostly a rebadged Challenger product. AMP MyNorth Pension, CFS FirstChoice, Netwealth, BT Panorama and HUB 24 all offer Challenger annuities.
Some have additional features for a fee, such as AMP’s MyNorth Pension that guarantees the investment value for five or ten years with an optional feature to lock in growth if markets go up.
CFS FirstChoice took out the 2021 Chant West award for best longevity product. “They have $1.5 billion (in Challenger and AIA annuities); much higher than anyone else,” says Fryer.
“They have been more successful at getting money into annuities because they actively promote it and work with Challenger to educate advisers.” It’s advisers who are effectively selling retail retirement products to clients, but Fryer says most are used to putting people into account-based pensions.
Some industry funds also offer an annuity. 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, the launch of QSuper’s Lifetime Pension in March 2021 has raised the bar for longevity products. Unlike traditional annuities that rely on fixed interest and cash investments thereby locking in returns, QSuper’s Lifetime Pension has an allocation to growth assets that will allow the income payments to grow over time.
Walter is aged 67, 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|
|Account-based pension balance||$550,000||$300,000|
|Lifetime Pension purchase price||Nil||$250,000|
|Total yearly income||$27,500||$37,013|
- *Income based on withdrawal rate of 5%
- **Payments based on 2020–21 financial year, single option
- ***Age Pension income estate based on income and assets tests as at 1 July 2020.
As a result of the reduction in assessable assets, Walter’s Age Pension entitlement has increased from nil to $4,505, and his total annual income has increased by $9,513.
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 Guaranteed Lifetime Income 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.
Whereas traditional annuities are offered by life insurance offices and come with capital adequacy requirements that effectively restrict them to lower risk/lower return, fixed income investments, QSuper uses a group self-annuitisation model that allows it to invest more in growth assets.
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. Up till now there’s been no regulatory stick, though that’s about to change.
The Retirement Income Covenant, which was first proposed in 2018 and originally scheduled to come into force in July 2020, would require trustees to consider the needs and preferences of members and ensure retirees have greater choice in how they withdraw their super benefits in retirement.
Due to delays caused by COVID, it’s now set to come into force on 1 July 2022 to allow for more consultation and legislative drafting.
“Chant West expects over the next six to nine months there will be a number of funds bringing out these products, and over the next 12 months there will be a lot,” says Fryer.