Ralph Stewart returns with new product

Congratulations Ralph, great news I am sure you will attract a loyal following from investors and the ex AXA advisors. Your credentials and integrity are ideal in such a market.

All the best Ian

Well done, Ralph! This is sorely needed today.

All the best
Glenn

My advice is to suspend the back slapping and hold the champagne until you have calculated the irrr implicit in each deal.

Agree with Brent entirely.

The nominal IRR on the figures is lousy. The annuitant has to live almost 20 years just to get their money capital back. What's the life expectancy of a 65 year old male? And female?

Of course you might live to 120......

A big problem with annuities is always future inflation. Has the inflation risk issue been solved with this proposed new entrant?

"A big problem with annuities is always future inflation."

While there was no mention of indexing, Murray, you would have to think that any modern product that doesn't account for inflation simply wouldn't sell.

"The annuitant has to live almost 20 years just to get their money capital back."

And over that time they have had a guaranteed income with no worry about market performance. That certainty is worth something. How much is it worth in foregone investment return? Well, that will differ for every individual, so its a little early to claim there is no market for the product.

Is this a product that pays a guaranteed 5.2% per year, indexed, for life? TD will give you 5.5% for five years. People moving from TD's now will like the rate. And I cant see them balking at giving a 0.3% discount to lock in the rate for life.

Would obviously be better with plenty of choices, ie fixed term annuity or money preferred annuity

Thanks Murray
Calculating an IRR takes a bit of work and given the IRR is probably the only way of us assessing the attractiveness of the annuities to put clients interest first and assess the product properly it’s what RFA’s and AFA’s are going to have to do I guess.

My first thought was to compel the provider to provide this info but even there you have the problem of communicating that data objectively to the client and understanding internal rate of returns does take some work.

So an interesting topic for sure. Hopefully the FMA are on top of this. Anyone who isn’t should Google internal rate of return.

I spent the first five years of my life in the business world calculating these things using Monte Carlo based probability simulation. LOL.
Regards Brent

In reply to Kimble
Where do you get the idea that the annuities being talked about are indexed (for inflation)?

Also you don't seem to understand that when you buy an annuity, you give up your capital in return for an annual payment stream - you don't get your capital back at the end like you do with a TD.

And I didn't say there was no market for the product. My earlier blog actually asked the question "Has the inflation risk [with annuities]been solved?"

All - thank you for the comments to Philip's article and I am sorry for the slow response. Just a couple of points if you will.

1. IRR - hear you 110% - cost is everything in a lifetime income product. The longer an investors capital lasts during a fixed withdrawal period the longer the period before the guarantee is called upon and yes the higher the IRR. The NZIG website will go live at the end of the month which has a number of worked examples from which the IRR can be calculated. Equally Milkman in Sydney are building and will support an active calculator on the site which will include an IRR. In the interim i am posting product information on Facebook/NZIG if you are interested.

2. Please remember this is not a traditional annuity the technical term is a deferred variable annuity with guaranteed life time withdrawal benefits. We do not swap an investors capital for the personal mortality risk like a traditional annuity. An investors capital is always available and on death the account balance is paid to the estate.

3. There is an inflation hedge but it is not perfect. The investment goes into a 55/45 balanced fund, the underlying investment is vanguard conservative (55) and vanguard balanced (45) in $A (which is hedged to NZ$). This should produce ~6% less fess at circa 1% before tax. The product structure is a pie applying the investors individual tax rate. So for example purposes, if an investor invests $100k, they withdraw 5% p.a and receive ~4% p.a. For circa an additional ~1% an investor can purchase the guarantee which continues to pay the 5% after the capital has been exhausted. When this occurs in approx. 25 years post age 65 the only in come is the fixed 5% of the initial $100k which is not inflation adjusted. The underlying inflation hedge is the balanced investment returns during the capital withdrawal period. The regular withdrawals (5%) are capital and therefor after tax. NZIG has applied for a binding tax ruling for the new product.

Thank you for commenting.
Ralph

I don't see why a retiree would not just buy a NZ Government issued 2030 maturity indexed bond, recently issued at a yield of 3% (i.e. it pays the CPI rate + 3% each year).

No hassles, no fees, no credit risk, no uncertainty.........

Nice try but.....
Doesn't the holder have to pay tax on both the CPI adjustment and the coupon each year?

So 2% CPI + 3% coupon = 5% taxable income; assume 17.5% marginal tax rate (as most likely lowest tax applying since NZ Super uses up all of the 10.5 cents bracket.)

Cash received would be 3cent cash coupon less 0.875 cents tax = only 2.125%.

Retiree maintains real capital and spends real income of 2.125%.

Income probably not enough.

Maybe Ralph is on to a winner if it's decided Kiwisaver has to be taken as an annuity down the track? Isn't this being discussed at present amongst you investment gurus? Given that he would have the only annuity product left in NZ he may be in a good position...

RFA
Thank you.
Very interesting and absolutely the model in other parts of the OECD. I have been doing focus groups with 60 to 65 years olds and 65 year olds + around the country, one common theme has been a sense of concern over who controls KiwiSaver and that the Government my somehow be using the investments to their advantage (we know they can't).

I think a move to force partial annuitisation now would be a challenge. However.....because of this lack of trust in the recent IRD/Colmar Brunton KiwiSaver survey the results indicated that 58% would be looking for a new home for there KiwiSaver funds on turning 65 to increase their personal control over their KiwiSaver next egg.

Key for the new NZIG product with this degree of control needed is that the funds are always liquid, can be drawn at any time, and account balances are passed on to the estate on death.

Regards Ralph