Asiamoney: Where money goes next after emerging market debt
1 July, 2013Cerulli, Asia Pacific Edge: What Asia can learn from UCITS
1 July, 2013Smart Investor, July 2013
Getting Started
Among the minutiae of the Federal budget in May came a change which sounds tedious and arcane, but could have a big impact on your retirement: the extension of concessional tax treatment to deferred lifetime annuities.
DLAs – you can already sense the abbreviation finding its way into everyday personal finance parlance – can be seen as a form of insurance against living longer than you thought you would.
When you reach retirement, you look at your super balance, work out how much you expect to need to live on in retirement, and then have a pretty clear idea of how long it’s going to last. Perhaps you put most of your super in an investment option that will keep you in good income until you’re 80. If you also buy a DLA, though, that will start paying a similar income stream at about the time the original money runs out.
The reason it resembles insurance is because, as with car or home or life insurance, it’s possible you’ll never see any benefit from it – if you die while you’re still working through your super, the DLA will never start paying. But if you live to be much older than you expected to, then you will get a lot of income from it, and will live comfortably.
Even before the budget, several of the leading names in annuities have been looking closely at these deferred structures, among them Challenger, BT and CommInsure. There is, after all, a growing market for this: retirees are becoming an ever bigger part of Australian society, and they are all tending to live longer. As Challenger CEO Brian Benari says: “Australians enjoy one of the highest life expectancies in the world, and many can look forward to spending a third of their lives in retirement.”
So what’s changed? Well, until now, it has not been possible to buy DLAs using superannuation money, and consequently, nobody has really bothered to launch or promote them. From July 1 2014, people will be able to use their super to buy DLAs; consequently, expect many groups to start developing them (Challenger has already said it will be one of them).
Since they don’t yet exist in any practical form, we can’t analyse exactly what a product will look like, but they are likely to involve an up-front premium with income commencing at a pre-set later date, such as the 80th or 85th birthday. Providers are likely to offer index-linked products to guard against inflation, and analysts say the cost of protection will probably be 10-12% of a person’s retirement balance.
Planners like them because they remove a degree of uncertainty – and nothing is more uncertain than life expectancy. If planners can feel that a client’s income post-80 is under control, it is a lot easier to work out where to put superannuation in order to keep the retiree comfortable between retirement and the DLA kicking in.
The professional services group Towers Watson says there are three key risks for retirees in Australia: inflation, investment and longevity. We all know about the dangers of inflation – losing the spending power of your savings – and a duff investment, but Towers Watson says longevity risk is the least well understood. Since around 5.5 million Australians will reach the age of 65 in the next 20 years, with a combined pool of superannuation assets at retirement of around $1.6 trillion, it is clearly a big issue how those assets are used in retirement.
Box: An example
A retiree turns 65 with $250,000 in super. He believes he needs $40,000 a year in retirement. A financial advisor helps to develop an income strategy which , using $225,000 of that money, ought to provide sufficient return to deliver that until he is 80, since with that level of assets, he is still eligible for the age pension too.
He also buys a deferred lifetime annuity for $25,000 which will commence payments on his 80th birthday. If he dies before he turns 80, with the original super stream still paying out, he’ll never see the benefit of that DLA. But if he lives longer than that, then the DLA will kick in, again supplementing the age pension.
