In recent years, we’ve seen a shift by our Australian policymakers to encourage innovation when it comes to retirement income streams. This indicates that families in our country have
- Done a great job of accumulating wealth for retirement, but
- The systems in place haven’t necessarily helped Australians use their assets in the best way.
Many retirees are suffering from the fear of running out and becoming more conservative than they need to be, ultimately holding back on enjoying the full potential of their retirement.
“Governments want people to spend in retirement,” says AMP’s Head of Technical Strategy John Perri. “It’s good for the retirees, it’s good for the economy, it closes the loop on the whole mission of our super system.”
Living for today, and tomorrow
Among these innovations is a new generation of market-linked lifetime income stream products that offer a guaranteed but variable income, for life. Within these products there is capability to ‘front-end’ income payments, giving you more income to enjoy in the active years of retirement.
Let’s look at some of the other benefits of these market-linked lifetime income streams:
Pooling to spend
Putting a reasonable amount of capital into a market-linked lifetime income product can generate a higher income for you in retirement because it uses the power of ‘pooling’ your money with other investors. Industry expert, Ben Hillier puts it, “Like compound returns when accumulating wealth, pooling is like magic in the way it generates value for retirees, allowing for less conservative investment and higher levels of income.” The advantage of the new breed of market-linked lifetime income streams is they provide the benefits of pooling risk and return, but without locking away capital in a life insurance vehicle.
Taking off the mental load
An important element of looking after your physical health is looking after your mental health. When you know you have a regular income to supplement or replace the age pension, you can afford to enjoy your retirement – both psychologically and financially.
Accessing more age pension
An important part of new regulations is how these products are treated by Social Security. Only 60% of the purchase price of lifetime income streams count under the assets test. For example, if you purchase a lifetime income stream with $500,000 your asset test for age pension eligibility will be discounted to $300,000. And, after age 84, that number drops to 30%. Plus, only 60% of lifetime income counts under the income test. And by deferring the income in retirement or purchasing a lifetime income stream before retirement, the asset-test advantage can be even further enhanced.
Fixed vs Variable income
Fixed-income annuities have a long history in Australia, while market-linked lifetime income accounts are relatively new. Fixed-income annuities offer predictable lifelong income which gives retirees vital clarity around their budget. The downside? The income generated can be low, because fixed-income annuities require significant capital reserves and moderately conservative investments. Market-linked solutions offer retirees access to potentially higher income due to their exposure to growth assets. Of course, the trade-off for that potential extra return is the variability of the income stream.
A solution, but not the whole solution
Market-linked lifetime income streams aren’t a one stop fix to a complete retirement income solution. A lifetime income account means you reduce access to some capital and have less flexibility when it comes to estate planning. But it guarantees income until death, can improve age pension eligibility and offers a pathway to higher lifetime income.
