Investment products for retirees need to be developed
[UPDATED]The investment advice industry needs to prepare itself for the pending retirement of the baby boomers by providing suitable generic products that provide a Retirement Income Stream says investment adviser Peter Hensley.
Thursday, August 12th 2010, 5:00AM 
8 Comments
by Jenha White
He explores this in A White Paper, saying New Zealand obviously requires such products to be designed, built and available in order to provide choice in retirement, especially with the popularity of KiwiSaver which provides scheme members with a lump sum at the age of retirement.
ING head of KiwiSaver distribution David Boyle says the advice industry should be having big discussions about this issue as it will be stretched to deal with demand.
He says ING has around 13,000 customers that could take their money out from July 2012 and that might be funds worth $500 million.
Retirement Income Stream products are readily available in most Western countries and can be in the form of:
- Allocated Pensions
- Market Linked Pensions
- Lifetime Pensions aka Fixed Term Pensions
- Allocated and Market Linked Annuities
- Fixed Term and Lifetime Annuities
- Conventional and Managed Annuities
- Managed Annuities
- Pension Income Withdrawal
Hensley believes the New Zealand market requires a series of Allocated Pension type products. He says doing so would require the government to make a tax change to ensure tax free status of investment returns, legislative requirements for enforcement of low management fees (suggested approx 90 basis points) and legislative requirements to set minimum percentage drawdown.
He says Allocated Pension products would also need to assume consumption of capital, have switching between funds permitted within reason and for scheme managers to supply choice of investment strategy including a cash or term deposit option.
Hensley also supports the use of a collective investment vehicle to promote retirement savings, though says these should meet the minimum requirements set by the government-mandated KiwiSaver scheme.
Jenha is a TPL staff reporter. jenha@tarawera.co.nz
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Comments from our readers
On 13 August 2010 at 7:47 am EZYrider said:
He's referring to Australian Allocated Pensions where people are incentivised to buy retirement income streams, through offering tax advantages, instead of taking their superannuation money as a lump sum (and presumabably, spending it too quickly!). It's a problem NZ may face in a few years ...
On 13 August 2010 at 10:07 am Denis said:
I feel a bit out on a limb here because there seems to be a presumption within our industry that; a) there will be a market for this kind of thing, and
b) people be receiving large lump sums from KiwiSaver is a "problem" we have to address.
I can't see people voluntarily handing over their KiwiSaver savings to provider x or y in the hope that they might eventually get a better deal from an annuity product.
If approached with this idea, I expect most people to say "you must be joking!" (or variations on that theme).
What's wrong with keeping the funds liquid and drawing down what you need when you need it?
You can do that by simply leaving the funds in KiwiSaver beyond entitlement age. You also always have the ability to throw it all over to cash/term deposits at any time, if you want.
I am open to persuasion here, but for now I simply do not see a market.
On 13 August 2010 at 10:48 am Peter said:
The whole point about this is that in an increasingly complex world, with greater longevity and more people retired for longer, Peter Hensley is right in that something needs to be put in place to provide people choices. My experience is that, in New Zealand, there is little real understanding of how the investment world works,( look at the number of people who have been caught out by investing most of their money, or worse retirement fund into one or two Finance companies, just for that extra small percentage return).Retirement, which looking at current mortality rates, means many of us will need that income stream for more than 20 years. To rely on that income stream by putting the cash in the bank is fraught with danger for many people. A system which allows for capital and income drawdown, with the realisation that capital may, and probably will, need to be used over such a period of time is essential. Advisers will have to be increasingly competent to discuss a client's overall financial situation (including all investments) , health of both, their aspirations, income needs, attitude to risk, etc before being allowed to operate in this market.
There is also the question of how long the majority of clients are going to want to have to continue constantly reviewing this situation or taking a form of income, (fixed or increasing with inflation).
I think that Peter Hensley's intention is to get the debate moving forward and not leave it for a few more years. There will be a lot of baby boomers retiring in the next 10 years and a huge amount of money swilling around in the system. We need to take stock now and look at mature systems from around the world to see our way forward.
On 13 August 2010 at 10:56 am Peter said:
The whole point about this is that in an increasingly complex world, with greater longevity and more people retired for longer, Peter Hensley is right in that something needs to be put in place to provide people choices. My experience is that, in New Zealand, there is little real understanding of how the investment world works,( look at the number of people who have been caught out by investing most of their money, or worse retirement fund into one or two Finance companies, just for that extra small percentage return).Retirement, which looking at current mortality rates, means many of us will need that income stream for more than 20 years. To rely on that income stream by putting the cash in the bank is fraught with danger for many people. A system which allows for capital and income drawdown, with the realisation that capital may, and probably will, need to be used over such a period of time is essential. Advisers will have to be increasingly competent to discuss a client's overall financial situation (including all investments) , health of both, their aspirations, income needs, attitude to risk, etc before being allowed to operate in this market.
There is also the question of how long the majority of clients are going to want to have to continue constantly reviewing this situation or taking a form of income, (fixed or increasing with inflation).
I think that Peter Hensley's intention is to get the debate moving forward and not leave it for a few more years. There will be a lot of baby boomers retiring in the next 10 years and a huge amount of money swilling around in the system. We need to take stock now and look at mature systems from around the world to see our way forward.
On 13 August 2010 at 1:53 pm Denis said:
Yes, other countries have retirement income products. But this is nothing to do with their relative sophistication in comparison to NZ.
In those countries, tax relief is often applied to people's savings - the "deal" being that once retirement is reached, some or all of those savings have to be taken as a taxable income; not a lump sum.
So for those countries, I can see why a market exists for retirement income products because they have to.
On 17 August 2010 at 10:49 am David said:
If you knew how long you were going to live making your money last till you died would be easy. Clearly 50% of people will live longer than the average.
Retirees need some certainty that their money will last as long as they do. Many spend very little as they are concerned about running out.
Products that provide certainty of income in retirement may lead to a more satisfying and less stressed lifestyle for many retirees.
On 18 August 2010 at 11:45 am Denis said:
David, I can see the logic - and I agree with it. But I still cannot see the market. The "elephant in the room" is the finance company collapses. They also promised certainty and guaranteed income. Commenting is closed
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And allowing scheme managers to provide a deposit option? If investors want a deposit option isn't the best advice for them to take their money, pop down to the bank of their choice and negotiate a deposit? Why pay a 0.90% fee to an intermediary where no intermediation is required? With a 6 month deposit rate of about 4.5%, the intermediary's fee is 20% of the return!