The federal government’s recent “Retirement Income Review” pointed out that many retirees live on just the income from their superannuation, rather than drawing down on the balance as they progress through retirement.
This seems to be partly due to the major misunderstanding that this is how the system is supposed to work, and partly because seniors are afraid of running out of money, as they cannot estimate how long they will live. So, they draw only the minimum pension required.
As a result, many retirees die with a major chunk of their financial assets unspent, sacrificing their own living standards in the process, and leaving more to their beneficiaries.
In December 2016, Treasury called on income stream providers to develop new products that would help solve this problem. However, until now, the industry has been slow to take up the challenge. After a lot of talk and not much action, we finally have one super fund that has come up with an interesting solution.
QSuper, one of Australia’s largest super funds, has launched a new product – the Lifetime Pension – which pays a fortnightly income for life. It is designed to ensure you or your estate get back at least your initial investment, irrespective of how long you live.
Ideally, you would receive your return by income but, in case of premature death, it may be by death benefit. For example, if you invest $100,000 and die after receiving $60,000 in income, your beneficiaries would receive the final $40,000.
You can open a Lifetime Pension with your super any time between your 60th and 80th birthdays. Annual rates of income per $100,000 invested range from $6164 to $10,834 for singles – a bit less if you take the option to insure your spouse’s life, too. These pension rates are quite a bit higher than a regular lifetime annuity, or an account-based pension drawn at the minimum.
The reason is simple: the money is pooled and invested in a “balanced” growth option. Apart from the fund’s low management fees and the cost of insuring the money-back death benefit, all of the money is spent on income.
However, that also points to the product’s three drawbacks.
First, it is not a product where you can withdraw lump sums or exit after a six-month cooling-off period – you are permanently purchasing an income stream.
Second, after you have received your purchase price as income, no death benefit is payable.
Third, unlike a traditional annuity, which pays fixed income for life, this product pays variable income for life. That can be a double-edged sword.
Every July 1, the previous year’s income is adjusted based on how the pool performed against a benchmark net return of 5 per cent. Simplistically, if the return is more than 5 per cent, expect a proportional pay rise next year but, when returns are less than 5 per cent, expect a pay cut.
For example, let’s assume you were receiving $1000 a fortnight as an income stream. If net returns were 7 per cent – 2 per cent over the benchmark – you could expect your income to increase about 2 per cent the following year to $1020 a fortnight. However, if net returns were 3 per cent you could expect a cut to $980. In this way, the pool never runs out of money. Incomes are expected generally to rise over time, helping with inflation.
A major benefit of this Lifetime Pension is that only 60 per cent of the sum invested is assessed for the government’s assets test – and after you pass your official life expectancy it drops to 30 per cent. This, therefore, gives assets-tested pensioners an immediate rise in their age pension, in addition to the income from the product. Also, it may allow people who are unable to get the age pension because they are over the assets test limit by a small margin to qualify for at least a part age pension.
A 70-year-old couple have $600,000 in an account-based pension and $100,000 in personal assets. They draw the minimum pension and receive $30,000 a year from their account-based pension and $13,960 from the age pension, as a combined income.
If they invested $300,000 in a Lifetime Pension, that would pay them an income of $20,053 a year, paid fortnightly, and their age pension would rise to $23,228 a year. That’s a great return on a $300,000 investment. Combined with their account-based pension income of $15,000, their total income would rise to $58,281 – an increase of $14,321 or 33 per cent.
The Lifetime Pension may not be suitable for income-tested pensioners because 60 per cent of the income is assessed for the income test. This is a much higher proportion than people who are subject to deeming.
Personally, I would not recommend anyone put all their money into a product like this, as it provides no flexibility to withdraw lump sums when needed. However, it is well worth considering in conjunction with an account-based pension, as the combination would offer a very good income for life and the concessional assets test on one hand, and flexibility on the other.
It is really a matter of discussing the potential of the product with your financial adviser and deciding whether it is appropriate for your own personal situation.
Advice given in this article is general in nature and is not intended to influence readers’ decisions about financial products. They should seek their own professional advice before making financial decisions.