The government's recent retirement income review pointed out that many retirees live on just the income from their superannuation, rather than drawing down on the balance as they progress through retirement. As a result, many retirees die with a major chunk of their financial assets unspent, sacrificing their own standard of living, and leaving more to their beneficiaries.
In December 2016, the Treasury called on income stream providers to develop products that would solve this problem, but to date, the industry has been slow to take up the challenge. After a lot of talk and not much action, we finally have one fund that has come up with an interesting solution.
QSuper, one of Australia's largest superannuation funds, has just launched a new product, the Lifetime Pension, which pays a fortnightly income for life. It is designed to ensure you or your estate get back at least your initial investment, irrespective of how long you live. Ideally you would receive your return by income, but for a premature death it may be by death benefit. For example, if you invest $100,000 and die after receiving $60,000 in income, your beneficiaries will receive the final $40,000.
You can open a lifetime pension with your super any time between your 60th and 80th birthdays. Annual rates of income per $100,000 invested range from $6,164 to $10,834 for singles - a bit less if you take the option to cover your spouse's life too.
These pension rates are quite a bit higher than a lifetime annuity or an account-based pension drawn at the minimum. The reason is simple: the money is pooled and invested in a balanced growth option. Apart from the fund's low management fees and the cost of insuring the money-back death benefit, all of the money is spent on income. However, that also points to the products three drawbacks.
First, this isn't a product where you can withdraw lump sums or exit after a six-month cooling off period - you are permanently purchasing an income stream. Second, after you've received your purchase price as income, no death benefit is payable. And third, unlike a traditional annuity which pays fixed income for life, this product pays variable income for life.
Every 1st of July, the previous year's income is adjusted based on how the pool performed against a benchmark net return of 5 per cent.
Simplistically, if the return is over 5 per cent, expect a proportional pay-rise next year, but when returns are less than 5 per cent expect a pay-cut. For example, let's assume you were receiving $1,000 a fortnight. If net returns were 7 per cent (2 per cent over the benchmark), you'd expect your income to increase approximately 2 per cent the following year to $1,020 a fortnight, but if net returns were 3 per cent you could expect a cut to $980. In this way, the pool never runs out of money - incomes are expected generally to rise over time, helping with inflation.
A major benefit of this Lifetime Pension product is that only 60 per cent of the sum invested is assessed for the assets test (and after you pass your official life expectancy it drops to 30 per cent). This therefore gives assets-tested pensioners an immediate rise in their age pension, in addition to the income from the product. Also, it may allow people who are currently unable to get the age pension because they are over the assets test by a small margin to qualify for at least a part pension.
CASE STUDY A 70-year-old couple have $600,000 in an account-based pension and $100,000 in personal assets. They draw the minimum pension, and currently receive $30,000 a year from their account-based pension and $13,960 from the age pension, as a combined income. If they invested $300,000 in a Lifetime Pension that would pay them an income of $20,053 a year, paid fortnightly, and their age pension would rise to $23,228 a year. That's a great return on a $300,000 investment! Combined with their account-based pension income of $15,000, their total income has risen to $58,281 - an increase of $14,321 or 33 per cent.
The Lifetime Pension product may not be suitable for income-tested pensioners because 60 per cent of the income is assessed for the income test - this is a much higher proportion than people who are subject to deeming.
Personally, I wouldn't recommend anyone put all their money into a product like this, as it provides no flexibility to withdraw lump sums when needed.
However, it is well worth considering in conjunction with an account-based pension, as the combination would offer a very good income for life and the concessional assets test on one hand, and flexibility on the other. It's really a matter of discussing the product with your adviser and deciding whether it's appropriate for your own situation.
Noel answers your money questions
We have $336,000 and $317,000 respectively in super and have been drawing the minimum amount of $42,000 a year post retirement. The majority of our portfolio is invested across a broad range of products however there is incorporated within the portfolio a cash account to facilitate scheduled payments and other costs.
This cash account started at $80,000 but has dwindled over time to $25,000. We have been asked to consider topping this up. We are told a minimum cash balance should not fall below $3000 or 1.0% of the total assets. If we don't top up the cash account investments will be sold across the portfolio to replace the cash shortfall.
What would you suggest we do considering our super balance and age? We could top up with the money we have put aside to replace our old car but are not keen to do that.
It is always a good policy to keep at least three years planned expenses in cash. Therefore, if you believe that $42,000 a year plus the age pension is about what you need, I suggest you keep around $126,000 in the cash form. Because of the way the mathematics work the rate of return doesn't matter if the term is fairly short - therefore I would not be concerned about moving some of your portfolio growth to cash. Remember, as your assets reduce, your pension will increase so don't be frightened to spend.
I am single, no dependants 57-year-old and have recently come into an inheritance of $60,000. My mortgage is paid off and I have no debts. I currently have $440,000 in super. Should I deposit some or all of the inheritance into my super?
I think superannuation is the perfect investment vehicle as you are at an age where lack of access is not a problem. The main decision is how much, if any, will be a concessional contribution for which you could claim a tax deduction.
For example, if you earned $100,000 a year now and the employer contribution is $10,000 a year, you could make an additional $15,000 as a concessional contribution and claim a tax deduction for it. The balance could be contributed as a non-concessional contribution for which no tax deduction is available.
If you have shares in the stock market, how does that affect the calculations for a pension? Does Centrelink take the value that you paid for the stocks, or the value of the stocks on a certain date?
Each year on 20 March and 20 September Centrelink values your market linked investments, such as shares and managed investments, based on the latest unit prices held by them.
These investments are also revalued when you advise of a change to your investment portfolio or when you request a revaluation of your shares and managed investments. If the value of your investments has fallen, there may be an increase in your payment - if the value of your investments has increased, then your payment may go down.
The rules are in favour of pensioners. If the value of your portfolio arises because of market movements you are not required to advise Centrelink of the change - it will happen automatically at the next six monthly revaluation. However, if your portfolio falls you have the ability to notify Centrelink immediately.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: email@example.com