Helping You Loosen the Purse Strings
- Jarrod Boyd
In recent times, there’s been a shift by Australian policy makers to encourage innovation when it comes to retirement income streams.
Overall, this move is a recognition of two key facts:
- We’ve done a great job of accumulating wealth for retirement, but
- The system hasn’t really helped Australians use their assets in the best way.
Often, many retirees are more fearful and conservative than they need to be and, as a result, don’t enjoy their retirement as fully as they could.
Live for today, and tomorrow
Chief among these innovations is a new generation of market-linked lifetime income stream products that offer a guaranteed but variable income, for life. And you can even ‘front-end’ income payments, giving you more income to enjoy in the active years of retirement.
Let’s take a look at some of the other benefits of these market-linked lifetime income streams, shown below.
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.
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.
Psychological safety
A Michigan University study of over 20,000 US retirees found those with a secure income – for example, via a lifetime income stream – enjoyed greater life satisfaction (regardless of different wealth levels).1
It appears that 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-income versus 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 the complete retirement income solution.
Strategies that link ABPs and lifetime income streams are likely to deliver powerful outcomes. The Australian Government Actuary has claimed that a combination of lifetime income streams with account-based products could deliver 14-31% higher incomes than an ABP solution alone.2
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General Advice Warning: This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.
References:
1 Actuaries develop a framework for maximising retirement income, Jim Hennington and Andrew Boal, Institute of Actuaries, April 2022
2 Financial System Inquiry, Final Report, Australian Treasury, 2014 (Modelling by the Australian Government Actuary for the Inquiry)
Original article: AMP (2023). Helping you loosen the purse strings. Financial Planning Newsletter – Summer Edition 2023, p. 3-4.
