Tag Archives | annuities

Annuities for Retirement Income

Retirement IncomeAnnuities for Retirement Income

Retirement is something to look forward to – a new way of being, and lots of new experiences ahead. However, there is one big concern, and that is making sure there is enough money to provide a comfortable lifestyle until the end of life. Accumulating money in KiwiSaver or superannuation scheme is straightforward; it’s just a matter of setting up a regular payment into the scheme where it is managed. Once the funds become available on reaching retirement, the big question is what to do with them.

In simple terms, most retirees want an ongoing income that is higher than NZ Superannuation and access to occasional lump sums for big one-off expenses such as buying a new car or travelling overseas. One solution for this is to have an investment portfolio which comprises an annuity to provide ongoing income and a lump sum invested in liquid assets which can be sold to release additional funds. An annuity is a contractual financial product which converts a lump sum into a series of regular payments for life. The payments made are a combination of investment return and repayment of investment capital. Old style annuities have no residual value on death and do not allow withdrawal of lump sums over and above the regular payments however there are new products which offer residual value and withdrawals.

Unfortunately, annuities have limited availability in New Zealand. Members of the now closed Government Superannuation Scheme and certain company superannuation schemes may have the option of taking some or all of their funds as an annuity. Late last year a new annuity product called Lifetime Income Fund was launched with the aim of making annuities a more widely available option for retired investors. The key advantage of annuities is certainty of income – something which most retirees desire.

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A Regular Retirement Income

NotesCoinsA Regular Retirement Income

Most people dream of a comfortable retirement where a regular income flows into their bank account that is sufficient to cover more than just basic needs. For many retirees, this dream never becomes a reality. The 2013 Review of Retirement Income Policies discussion document released by the Commission for Financial Literacy and Retirement Income (CFLRI) highlights the fact that 40% of New Zealanders aged 66 and over have NZ Superannuation as virtually their only source of income. Put this together with the fact that the level of income provided by NZ Superannuation is very close to the OECD poverty benchmark and it is clear that a large percentage of retirees must be struggling financially.

KiwiSaver will go some way towards solving this problem in years to come. Over the next 15 years, around half a million KiwiSaver members will turn 65 and be able to access their funds. One of the recommendations of the CFLRI discussion document is that a review be done of the viability of providing annuities, especially for KiwiSaver balances. Annuities provide regular payments over the course of retirement as an alternative to a lump sum, which is tempting to spend. It is virtually impossible to purchase an annuity in New Zealand at present, however a new company, NZ Income Guarantee, hopes to launch an annuity product in April, 2014. Based on a sum of $100,000 invested and an indicative return of 5% before tax, this would produce a guaranteed income of about $100 a week, with an option to also access up to 5% of the capital each year for unexpected expenses. As KiwiSaver takes on more importance for retirement savings, more options will become available that will enable retirees to convert KiwiSaver and corporate superannuation funds into a guaranteed regular income to supplement NZ Superannuation.

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Save the Nation

Save the Nation

New Zealand is on the brink of a financial crisis unless national savings increases, according to the final report of the Savings Working Group (SWG). Government, households and businesses are all guilty of overspending and borrowing too much money, leaving our economy in a vulnerable state. The SWG has recommended policies to increase the quality, quantity and rewards of saving. These include reducing serious tax distortions, and improving the disclosure for financial products, especially for fees and performance as well as improving their efficiency and returns.

In the area of retirement saving, the SWG has recommended that all employees over the age of 18 be automatically enrolled in KiwiSaver with the ability to opt out. At present, automatic enrolment applies only for new employees. Also recommended is that the enrolment age be lowered to 16 and that the default employee contribution be set at 4% with the option to drop it to 2%. Of course, one of the most obvious solutions to our savings problem is to increase the retirement age. Despite this being a good economic solution it is still politically unacceptable, at least until after the next election.

The proposal for the Government to help make annuities available to retirees is an excellent one. Many retirees prefer to have a regular monthly payment to supplement income rather than a lump sum to invest. It has been suggested that payouts from KiwiSaver could be part lump sum and part annuity.

While much progress has been made to introduce financial literacy into the school curriculum, the SWG has gone one step further and suggested that financial education be compulsory in schools. This is to be applauded. Increasing the level of knowledge of financial matters is critical for changing attitudes towards saving and thereby securing the financial future of our nation.

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