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Retirement income products: What are my options?
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BY VOSTRO PRIVATE WEALTH

The biggest fears for Joy Sparks upon retiring after 40 busy years as a school teacher were whether she had enough super savings and how to build a new and rewarding lifestyle. Sparks is one of nearly 700 people a day ending full-time work over the next 10 years, which totals about 2.5 million, according to the Australian Prudential Regulation Authority which monitors superannuation funds.
The Baby Boomer retirement bulge is creating many new challenges for retirees and the nation’s $3.5 trillion super industry. Sparks, who is a self-funded retiree, owns her own home and tops up her super with part-time work teaching art.

“I am comfortable, but it’s tight,” says Sparks. “There are no extravagances, I need to be careful to make ends meet.”

According to the Australian Bureau of Statistics, a woman retiring at age 64 has a life expectancy of another 20 years, while for men of the same age it is 16 years.

Kaye Fallick, a retirement coach, says Sparks’ concerns about health, wealth and a sense of relevance are typical. Many of those retiring are also mystified about how to navigate through complex retirement and Centrelink regulations. More than 60 per cent of people aged 65 and over receive income support payments, predominantly the age pension, according to analysis by AustralianSuper, the nation’s largest super fund with more than 3.3 million members.

           

“Retirees have many concerns,” says Fallick. “They are worried whether they have enough money, [or about] organising time and maintaining a sense of relevance, particularly for those who had worked in senior positions.”

There is also the complexity of retirement financial planning, super rules, transitioning from work and navigating through a range of options for retirement income products. How to manage and fund the increase in retirees is currently being reviewed by the federal government, including ways to create a new retirement system where a member can have an account for life by removing the barrier between work and retirement. The review is also attempting to simplify the system and better integrate self-funded super with the age pension.

New income products

Super funds, particularly those with an older demographic, are unrolling strategies to deal with members moving from accumulation phase, which involves saving for retirement, to pre-retirement and retirement. A particular focus is so-called longevity risk, or the risk of outliving savings. Around one in six of TelstraSuper’s 84,000 members are retired, which is encouraging its focus on developing innovative strategies and investment portfolios to retain retired members. For example, the $26 billion fund has developed RetireAccess Lifetime Pension with investment manager Challenger Group, to provide a guaranteed income for life. Members can choose between a pension indexed for inflation or market-linked. Chief Investment Officer Graeme Miller says retirees who have part of their super in an annuity-style product – and are therefore more confident that their super will not run out – are more likely to invest in growth strategies with their remaining portfolio. Fund providers, such as AMP, are also responding with hybrid products that combine a range of investment options with lifetime cash flow. Ben Hillier, AMP’s general manager of retirement solutions, says members of its MyNorth Lifetime product, which pays a lifetime income, have increased their spending during retirement by 50 per cent.

Hillier says: “Retirees are confident about spending more because they know they will never run out of cash.”

Allianz Retire + offers AGILE (Allianz Guaranteed Income for Life), is another product using annuities to lock in income at a set rate. For retirees like Sparks, a mother of three adult children, that means being able to focus on their art, photography and involvement in charities while supplementing her retirement pension with part-time teaching.

“Keep active and committed,” she says about sustaining a healthy and happy retirement.

Experts say a range of options can help funding:

1. Transition to retirement

A transition to retirement (TTR) pension allows eligible savers to supplement their income by accessing some of their super upon reaching preservation age, which is between 55 and 60, depending on the date of birth, or 65, even if you are still working. Pension payments, which range from 4 per cent to 10 per cent of the account balance, are taxed at 15 per cent up to 59 years of age and are tax-free at 60 years or older. Liam Shorte, founder and financial adviser with self-managed super fund (SMSF) specialist Sonas Wealth, says those with a job after 60 can bypass the TTR and open a full account-based pension, which has the added benefit of no upper limit on tax-free withdrawals. The earnings supporting the pension also become tax-exempt, rather than waiting until 65. It also enables working hours to be cut back without reducing income, while continuing to make super contributions.

                 

2. Unlock home equity

One-in-three retirees still have a bank mortgage, which reduces retirement income and puts housing at risk if the person misses repayments and defaults, according to Josh Funder, chief executive of Household Capital, which offers products enabling retirees to unlock their home equity. For an estimated 4.5 million retirees, equity in their homes is on average about four to five times their super savings, which for male Baby Boomers is about $150,000 and for women about $80,000, according to government research. The Government’s Home Equity Access Scheme is offering loans at the bargain rate of 3.95 per cent, which compares to the Reserve Bank’s cash rate of 4.35 per cent and more than 9 per cent for commercial equity release schemes. The loans enable the borrower to access the unencumbered value of their property. The government scheme allows retirees to tap into their home equity to top up their retirement income by up to 150 per cent of the maximum rate of a qualifying pension. That’s about $2400 for couples and about $1600 for singles, and imposes a 12-month cap of 50 per cent of the maximum annual maximum age pension, or about $14,000 for singles and about $21,000 for couples. Commercial schemes are more flexible and provide lump sum payments, rather than cash top-ups.

3. Guaranteed income

Annuities have been growing in popularity as retirees look for products that guarantee an agreed income and reduce the worry about falling returns from volatile stockmarkets and low interest rates. An annuity, which is also known as a lifetime or fixed-term pension, provides guaranteed income for a set term or the rest of a life. This helps smooth peaks and troughs in market returns from super assets, which makes it easier to plan budgets and reduces retirees’ fear of running out of money as they grow older. Investors can choose between investment-linked and traditional lifetime annuities. An investment-linked annuity includes guaranteed income payments, but the level reflects the performance of a chosen investment option. Traditional lifetime annuities pay an income stream guaranteed for life, sometimes with an inflation adjustment. Around five companies offer investment-linked annuities, including Challenger, Generation Life, AMP and Allianz Retire+. The percentage of guaranteed income will vary depending on individual’s appetite for risk, according to Kellie Davidson, a partner specialising in wealth management with Pitcher Partners.

“They have a place for a smaller portfolio of, say, less the $1 million because there is merit in locking away some capital for guaranteeing income. I would invest around 20 per cent, but the percentage depends on individuals requirements,” Davidson says.

 
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