With over 5 million Australians reaching retirement in the 2020s[1], government legislative changes have enabled the emergence of a new era of lifetime annuities, offering more income, more choice, and more flexibility, designed to help enable you to live the retirement lifestyle you desire.
Innovation in lifetime income stream products (collectively called lifetime annuities) has come about as Superannuation funds and life insurers have taken advantage of legislative changes to offer annuity products with features and flexibility that were not previously possible. These changes enable “flexibility in the design of income stream products to meet consumer preferences while ensuring income is provided throughout retirement”[2]. One key change was that lifetime annuities no longer had to guarantee the level of income or experience a reduction in income to enjoy these concessions. Innovative Income Stream products that meet these new requirements enjoy the same tax and social security concessions as more traditional lifetime annuities.
Investment-linked lifetime annuities
A small number of providers have launched lifetime income stream products that are investment-linked to date. A common feature of these new lifetime annuities is that they are investment or market-linked. This means that the level of income paid can rise and fall from one year to the next to reflect the return of the underlying investment options. It is recognised that investment-linked lifetime annuities with the right investment portfolio can be expected to provide income streams greater than the inflation rate.
Another common feature is that they offer an “income redistribution rate”. This feature can bring forward income into the early years of the annuity in return for discounting future returns. Australian and global studies show that spending in retirement declines over time. This feature enables retirees to spend more in their more active, earlier years of retirement. Lifetime annuities with income redistribution rates offer the ability to provide income streams that can meet these preferences.
Investment-linked lifetime annuities that provide a choice of investment options and the ability to switch between those options also provide greater flexibility than traditional lifetime annuities. Traditional lifetime annuities offer clients a stable income that either, never changes or increases in line with CPI. The trade-off for this income stability is that there is no ability to change the investment outcome to address changes in a client’s risk appetite or to react to changing market conditions. Investment-linked lifetime annuities also provide the potential to deliver more cumulative income over the life of the consumer.
Combining for a winning solution
Combining a lifetime annuity with an account-based pension and, if eligible, the Age Pension can help address inflation, market, and longevity risks. The right combination can also optimise retirement outcomes and gives retirees the confidence to spend their retirement savings instead of worrying about running out of money.
Studies show that many Australians have not lived the lifestyle in retirement that they deserve. They’ve saved their retirement savings rather than spent them. They’ve gotten to an age where they can no longer spend their retirement savings as they’d like, and they look back with regret on lost opportunities. A lifetime annuity combined with an account-based pension can address this ‘regret risk’ by encouraging confidence in retirement spending.
The needs and preferences differ from one retiree to the next, and with the emergence of a new type of lifetime annuity, as advisers, we can navigate the complexities to combine an account-based pension with an investment-linked lifetime annuity to help optimise your retirement income.
We’re able to help you by explaining the investment process, and balancing family and estate planning issues, to ensure your sense of obligation to your children doesn’t reduce your own living standards.
Ask us about whether a retirement income product may suit your needs and lifestyle desires in retirement.
[1] Australia Bureau of Statistics May 2020. Retirement and Retirement Intentions, Australia
[2] Treasury Laws Amendment (2017 Measures No. 1) Regulations 2017