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A new retirement income product offers hope

Increasing life expectancies are welcome, but they present challenges for retirees. Many people have told me, “I want to be able to spend all my money, so on the day I die I have got just one dollar in the bank,” but it’s a fact of life that date of death is not something that can normally be predicted with precision. One study has found there is little correlation between a person’s and their parents’ dates of death - to make it worse, the behaviour of retirement assets can be volatile and subject to sudden changes.

To this interesting mix, add Australia’s somewhat unusual post-retirement system. In many other countries retirees are used to an income for life. All the investment decisions are taken from them, but they are generally happier and feel far more financially secure. In Australia most of us retire with a lump sum and have to decide how to invest it. For us, the challenge is how to best use that lump sum.

This highlights one of the major problems facing retirees, and Australia. It is now accepted by all the major political parties that the majority of retirees live far too cautiously, and in doing so both deprive themselves of a better standard of living and deprive the country of much-needed economic activity. So, the problem has been identified — the big challenge is how to solve it.

Until recently there were two major forms of retirement income streams available to retirees. Account-based pensions offer retirees flexibility, control, and transparency. They are widely available and are suitable for most retirees. However, they have one problem - there is no efficient way to draw down your balance without fear of running out. As a result, the majority of retirees draw only the minimum, resulting in many people passing away with 90% of their super left unspent according to the government’s Retirement Income Review.

The traditional alternative is a lifetime annuity, which provides a guaranteed income for life but without the flexibility, control, and transparency.

Obviously, annuities get full marks for certainty, but lose marks for lack of flexibility.

Importance of retirement income product features

Extracted from the Retirement Income Review Final Report, November 2020.
Note: More than 1,000 survey respondents aged 55 and over. Source: Mercer, 2019.

As part of the May 2018 Budget, the Morrison government announced its intention to introduce a retirement income covenant requiring trustees to develop a strategy that would help members achieve their retirement income objectives, which came into law on July 1 this year. The government wants the financial services industry to develop new retirement income stream products (a form of annuity) that manage the competing objectives of high income, longevity risk and flexibility. Longevity risk is possibly the greatest risk post-retirement — living so long you run out of money and ending your days living in a caravan in someone’s backyard, eating scraps.

Product innovation

The industry is starting to fill the gap with a range of enhanced account-based pensions and lifetime income streams or pensions. The account-based pension provides the flexibility — the lifetime income stream provides the certainty.

But could you combine an account-based pension with an annuity? AMP have asked this question and the result is MyNorth Lifetime, a new suite on AMP’s investment wrap platform North.

MyNorth Lifetime is the latest in a series of new retirement solutions. I’ve previously written about the QSuper Lifetime Pension which provides income for life based on the returns of a balanced portfolio, and which attracts a generous 40% discount on the assets test, leading to higher age pension eligibility for many retirees.

MyNorth Lifetime is much closer to an account-based pension than other lifetime income products, because it allows unrestricted investment choice, account transparency and income flexibility. The biggest differences to an account-based pension revolve around an annual cash bonus that is paid into the account.

This bonus is calculated by applying an age-based rate to your account balance. It operates as a form of reverse life insurance. Instead of paying premiums every year, you receive a payout every year, that increases substantially over time just like life insurance premiums. The only premium you pay is what’s left over in the account when you die (after the payment of an optional death benefit) – which is the opposite of a life insurance payout.

Effectively you are prepaying yourself – giving you the confidence to draw down at a higher rate knowing you’ll never run out of money. The income rates are quite a lot higher than the normal minimum drawdown rates.

For example, the income rate for a 70-year-old single is 8.18%, and the bonus rate is 0.56%. If this customer had $300,000 in their account, they’d be entitled to draw $24,551 in income and a bonus of $1,677 would be paid into their account at the end of the year. The following year the rates rise to 8.34% and 0.62%. These percentage rates rise every year, but your account balance is being drawn down, resulting in relatively stable amounts of income if you can earn around 6% net investment returns.

The upfront 40% assets test discount for lifetime income streams applies to this account. If the customer above had another $300,000 in an account-based pension and other assets, they’d be entitled to an age pension of $11,119 compared to only $1,734 without the new account. Like other lifetime income streams, I’d never recommend retirees allocate all of their super into these solutions – it’s important to keep readily accessible cash type investments as well.

The other unique thing about MyNorth Lifetime is that it can be opened pre-retirement where it can significantly increase the assets test discount. This is because Centrelink ignores the account balance and instead calculates the means test on your contributions, increased annually by the upper deeming rate (currently 2.25%). This means that as long as your super is earning more than the deeming rate, you are increasing the assets test discount, which could provide an even bigger age-pension payoff when you retire.

Case study

Jack is a pre-retiree. At age 50 he transfers $250,000 to the MyNorth super account. If the fund returns 6% per annum his balance should be almost $600,000 at age 65. However, for Centrelink purposes, his deemed balance would be close to $350,000 (the original balance increased annually by 2.25%), and therefore the assessment of his fund under the assets test would be only $210,000 after applying the 40% discount. This can make a very significant difference to the amount of age pension he would receive when he turns 67.

If this all seems a bit complicated, it’s because it is, so AMP are only making this available via financial advisers. It also has a unique feature in as much as the MyNorth product can be layered across the client’s existing portfolio, where it could be continued to be managed by the advisor without any changes to the underlying assets if that was deemed appropriate. I think AMP have broken ground with this one – it’s really up to anybody who feels it may be useful to them to discuss it in depth with their advisor.

 

Noel Whittaker is the author of 'Retirement Made Simple' and numerous other books on personal finance. See www.noelwhittaker.com.au or email noel@noelwhittaker.com.au. This article is general information and does not consider the circumstances of any individual.

 

35 Comments
Ross
November 09, 2022

Ross Now 80yrs still able to handel the so called "money needed to live well in retirement" Firstly a little bit of education on the part of the retiree's, early vision. "It's easy to be poor while your young but very hard when your old" We; my newly married wife and I (50yrs ago) made what now seems an easy decision after marriage at 30yrs.of age. We, borrowed. Built ourselves a factory in a progressive Sydney suburb after careful market research with very, very little money out layed. Now 45 yrs later our annual income well exceeds the original cost and has annual increases, 90% of the costs are paid by the tenant, managed by a reputable agent, little less then half through the 45 yrs ownership it was fully paid of while we were both still employed by way of the rents being paid. Now the interesting aspect, owned within a SMSF so there are no taxes on our draw from the every increasing pool as we are in pension mode. Now we will leave this valuable asset to our favorite charity on the passing of the last standing, if children were part of the family circle left to them to follow if they wished the same blue print of a great income in retirement.

Alan
November 05, 2022

Why not an old fashioned tontine. I put a chunk of my super balance into a locked account to which I no longer have access but I retain some control over what is is invested in. This investment increases with invested return as well as a "bonus" of the account balances of those that die. if I live to 90 then I get my share of the account at this point. This small portion of my super account removes the risk of living too long and I can concentrate on spending the rest while I am alive.

DM
November 05, 2022

At least with an account based pension, every product is essentially identical, making it easy to compare product features and fees.
Every new retirement product that addresses longevity is complex, opaque and “can only be sold by a financial adviser”. This is not good for the consumer.
There is no process that allows the transparent comparison of even the key features of different innovative retirement products (eg their respective hurdle rates), nor any guarantee that individual advisers will have either access to, or a sufficient understanding of, the relative pros and cons of each product before they make a recommendation.
Add all this to the current QAR proposals and we are in danger of returning to the wild Wild West. How can retirees protect their retirement in such an environment?

Fred
November 03, 2022

There is no solution to this retirement dilemma. Australia has the best system, and retirees have freedom to draw down to meet their changing needs.
Overseas pension funds pay a regular income, but there is no capital available to meet capital needs, like a new car, holidays, home repairs etc.
The AMP product is another variation that is unlikely to succeed.
I am an actuary and have spent a lifetime seeking a solution.
There is none!

Dudley
November 04, 2022

"There is no solution to this retirement dilemma.":
If the dilemma is access to a lump sum vs a pension then the solution is quite simple in Australia:
Ordinary expenditure rate never exceeds Age Pension payment rate. Savings and Earnings capitalised.
Extraordinary expenditure comes from capital.

Malcolm
November 05, 2022

I agree with Fred. Also I would be very careful about anything that AMP proposes having been previously short changed by this company for many years.

Brett
November 06, 2022

I beg to differ.

The solution is relatively simple.

Most people have a finite amount of retirement capital and will need to live off a combination of capital and returns so their capital will be depleted at some point if they live long enough.

They key to retirement income planning is budgeting. Once you've done a budget work out what is essential vs discretionary spending. If essential spending exceeds the maximum age pension payable, then you need to purchase "longevity insurance" in the form of an annuity to ensure your long-term essential expenditure is met.

Any remaining money should be used to purchase an account-based pension which will provide for your chosen level of discretionary expenditure until your capital runs out.

It's not that complicated - control what you can control.

Jon Kalkman
November 06, 2022

The solution to the retirement dilemma is not difficult. The problem is that most people start retirement with the equivalent of a tree plantation. Every year they need to cut down some trees for income and hope there is enough growth in the remaining trees so that this can continue doing this until they die. The difficulty is working out what is a safe amount to cut each year when the price of timber fluctuates and they don’t know when they will die. The problem is made harder if the price of timber falls dramatically and they need to cut more trees than they intended, because fewer trees means less growth and less income in the future. That means they then need a strategy to manage that price volatility, and that diversification usually means lower growth.

The solution to the retirement dilemma is to buy an orchard instead. Leave the trees intact and just harvest the fruit. As long as the annual yield of fruit at least keeps pace with inflation, then it doesn’t matter how long you live. If you can match the income yield to your expenditure, this can go on for a long time. You still need to have contingency plans for down years but you are not selling your income producing assets.

The biggest problem is deciding what to do with the orchard when you die.

Ben
November 06, 2022

Australian taxpayers don’t subsidise super to enable bequests of orchards to the kids. Super is there to fund retirement, not for inter generational wealth transfer. Anyway, the vast majority of retirees need to consume capital to fund a comfortable lifestyle. Market linked lifetime income streams can provide part of the answer; high rates of income that never run out.

David
November 07, 2022

Reply to Ben

Australian taxpayers don't subsidise super. This is people's money that they have earnt. Regarding any particular tax treatment on that money as a "subsidy" merely outs you as someone who feels entitled to grab and spend other people's money as you see fit. If you want to argue for change in the tax treatment, fine, do that, but the current arrangements are completely legal and part of the deal struck between superannuant and the government - reduced tax levied for having the money tied up for up to 40 years.

That people choose not to spend capital , where this is an option for them, is at least in part because of the continual changes that occur to the system just about every year coming from both sides of politics who just can't resist tinkering. Ask any retiree living off their super whether they trust either side of politics not to change the system in the future to the retiree's financial disadvantage and you'll get a "No" every time.

And many have even less faith about the destiny of the aged pension system, given the demographic forces now at play. This is also an entirely rational position.

So I bought an orchard and am living off the fruit. As I have no dependents, what will I do with the money left over when I die? More good than giving it to the federal government to waste on their latest scheme, I can assure you.

bluey
November 08, 2022

@Jon Kalkman, love the analogy and agree, this is my strategy too. The annual yield of fruit will definitely keep pace with inflation if you choose Australia's biggest and finest trees. When the yield exceeds expenditure, you should just continue to expand the orchard, and eventually you will no longer need 'a contingency plan for down years' when the yield becomes a multiple of expenditure.
What to do with the orchard at death? Charities.

Nick Callil
November 09, 2022

Jon

Buying an orchard (to use your analogy) is fine for the small proportion of retirees who have so much saved for retirement that just harvesting the fruit provided enough (or more) for them to live in comfort.

The heart of the retirement problem is how to encourage those with lesser savings to draw upon their capital (not just earnings), rather than leaving it behind, enabling them to enjoy a standard of living that is commensurate with the level of savings they have built up (with the help of the age pension).

Much of the sentiment we see in this forum (and elsewhere) seems to regard drawing capital in retirement as a cardinal sin. Its unhelpful, and unrealistic, for the vast majority of retirees.

Bluey
November 12, 2022

The key to owning the orchard is pick up trees as saplings, over a long period of time.
Regarding “..this highlights one of the major problems facing retirees, and Australia. It is now accepted by all the major political parties that the majority of retirees live far too cautiously, and in doing so both deprive themselves of a better standard of living and deprive the country of much-needed economic activity. So, the problem has been identified — the big challenge is how to solve it..” Well one way to solve it is to introduce a hefty death tax (or is that a ‘passing’ tax, as everyone seems to avoid the D word these days). Spending of savings would probably increase and any tax collected could be used for the economic benefit of Australia.

Michael2
November 13, 2022

A tree plantation or an orchard, a very simple analogy

David Orford
November 07, 2022

I am an Actuary too and have designed lifetime annuities and pensions for a variety of life insurers and the pension section of super funds - far more than any other actuary that I am aware of.

These are particularly dangerous products for the manufacturer - as there are mortality and investment risks - which are significant and death defying for a manufacturer. Some products are complex as they try to avoid or minimize these risks.
I agree with you that product complexity leads to product failure.

My team and I have always KISSed - Keep It Simple Stupid - and have recently designed a simple lifetime annuity for a life insurer that is simple - because the two major risks have been eliminated.

I haven't died yet - and don't intend to - so was the first person to buy one of these lifetime annuities. As we actuaries have at least 9 lives, I fully intend to live far beyond the life insurer's forecast of my life expectancy. I am laughing all the way to the bank.

Dudley
November 07, 2022

"I am an Actuary too and have designed lifetime annuities and pensions":

Which one has better risk and return than money in the bank?

Max Lewis
November 03, 2022

The Rertirement Income Review is at the least fallacious if not dishonest.

When would Treasury ever ever be concerned that retirees were not living as well as they should and depriving themselves of lifestyle. There is an avalanche of absurdity at the thought of a bunch of Bureaucrats sitting in judgement on a group, who have worked all of their lives contributed to super long before, in many instances, it became compulsory, paid off mortgages at exceptional interest rates and educated their children before the 'handout out society'.

Just perhaps the conclusion of the Retirement Income Review was pre ordained at inception and was the conclusion needed to justify the creation of this 'mickey mouse' nonsense concept of a Retirement Incorme Covenant.

Now who will really benefit from this --not the retiree , I would suggest---- but---believe it or not 'industry heavyweieghts, who will be able to lock up funds forever and reap the windfall on death.

How can they do this one might ask? Well unqualified conflicted intrafund advisers will now be given 'carte blanche' when it comes to recommendations due to the watering down of advice standards , curiously hiding under the nomenclature of Quality Adbvice Review standards.

Former Treasury policy maker
November 06, 2022

The insinuation that Treasury doesn't care about getting the best outcome for the Australian people is unfounded mean-spirited prejudice.

Glen Cunningham
November 23, 2022

Treasury has always had a problem with the tax benefits associated with Super and have waged a 50 year campaign to reduce those benefits through government. They continue to be successful.

Former Treasury policy maker
November 23, 2022

Glen Cunningham,
I'd rather see you provide evidence than simply nay-say what I said.
What you will find is that the Government Department responsible for managing the fiscal affairs of the country has been doing its job and pointing out to the government the costs (and benefits) of all sorts of policies, including superannuation and associated tax arrangements. That's their mandate, it's what we all should expect of a good Treasury Department.
That is NOT a campaign against super at all. The in fact are advocates for a good retirement income strategy because of the savings down the track from pension payments in an ageing economy (something you'd be aware of from their regular long run projection exercises begun when Ken Henry was head of the department) and because of the macro economic benefits of encouraging a greater long run savings pool from which capital investment can be funded with less reliance on overseas borrowings.
I can only assume that you've been very selective in what you've read of what Treasury actually says in budget papers and other documents.

Jack
November 03, 2022

The line that caught my attention was: "The only premium you pay is what’s left over in the account when you die (after the payment of an optional death benefit)".
That means, just like an annuity, there is no residual on death - you really are converting all your capital into income. And because you can't access lump sums, Centrelink adjusts the pension assets test accordingly.
Therefore, just like an annuity, you are taking a bet on your longevity with the insurance company. Because it is a pooled investment, the people who die at a younger age leave money in the pool to pay income for people who die at an older age.
The difference seems to be that unlike an annuity, which is most often backed by bonds, this one is backed by their balanced funds which gives a higher return. I imagine they have considered the associated risks.
I guess this product might be attractive to some people, particularly those who have no wish to leave a bequest and spend it all before they die.

Steve
November 03, 2022

Some of the lines here seem contradictory. First you control the investment mix but the income seems to have a fixed value (8.18% for a 70 year old single), and another line that says "These percentage rates rise every year, but your account balance is being drawn down, resulting in relatively stable amounts of income if you can earn around 6% net investment returns." So if your investments under-deliver, you can still run out of money as you are drawing down your account balance? The cash bonus seems a sideshow as it is less than 10% of the overall income. Is the phrase product innovation meant to be for the customer or the provider? And the fees?
As a sales pitch this falls way short.

David W
November 03, 2022

I can answer some of these. The bonus rates rise quite a lot so if you live in your 90s or beyond a lot of your income comes from the bonus, that makes sure your account never runs out. I can’t remember the rates but they’re all in the PDS. Same as the fees, only .1% extra, North fees are actually very good and they have a cap for families up to six people.
The income has a fixed %, not $ it’s based in your account balance like a normal account based pension, this one just doesn’t run out.

David W
November 02, 2022

I went to a class for advisers - this thing achieves some seriously impressive centerlink and tax results - there's nothing like it where the client can generate lifetime income off whatever portfolio they want. Opening it before retirement like the case study above is a no-brainer - clients aren't locked in but you can't get those age pension benefits any other way (unless you invest in some dodgy bitcoin and lose all your money haha).

Shiraz
November 02, 2022


Only invest if you understand the Product.

Denial
November 06, 2022

Yep 100%. Many QSuper members now regretting their decision

Dubious
November 13, 2022

Steady on champ - care to back that baseless claim up? I don't work for QSuper, but I've spoken to a bunch of advisers about that product and I've heard about nothing but satisfied customers. Where do you work by the way?

Peter.C
November 02, 2022

If AMP can make 6% return on anything they peddle I'll be a monkeys uncle, I've seen enough of thier negative results and high fees in other poor sod's accounts, I don't see this being any different.

Wilma
November 02, 2022

they let you invest in anything on the platform - not just AMP stuff. I'm on the platform and don't have any AMP investments, mostly term deposits, ETFs and some direct shares

Trevor
November 02, 2022

Was Noel Whittaker paid by AMP to write this piece of independent journalism?

James Gruber
November 02, 2022

Trevor, let's refrain from the personal comments and stick to the product. We can vouch for Noel's independence.

Roger Brown
November 02, 2022

Whittaker's simplistic hyperbole is irritating. " Longevity risk is possibly the greatest risk post-retirement — living so long you run out of money and ending your days living in a caravan in someone’s backyard, eating scraps." The age pension provides a down-side hedge for all retirees, and should be acknowledged as such. While that may not be recognised in the wider community, it is incumbent on professional advisers and investors to help educate, and hence lead to greater confidence that retirees can afford to draw down a greater proportion of their superannuation benefit.

Wary
November 02, 2022

There is significant risk in taking on lifetime-based product from AMP. This would be relevant for all providers, but particularly for AMP. Will AMP still be around for the duration of your remaining lifetime, and if not who they have sold this to? Anyone with any AMP life insurance or whole of life insurance policy is surely aware of these risks.

BJ
November 02, 2022

Wary - there was an article about your question in the Australian. Unlike annuities, this has an account balance and you can see all your investments. If AMP is sold or something, the assets are all there in your name - they'd be transferred to a new super fund. And an external insurer (TAL) makes the annual bonus payments, and they only get paid when you die as Noel says above, so if TAL goes under, you're laughing because they've paid you and you've never paid them. So unlike annuities, you're not really exposed to the risk of the company going under.

Kim Perry
November 11, 2022

If TAL goes under (highly unlikely) it’s life business will be transferred to another life insurer which will pick up the balance on death!

 

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