Will lifetime income streams solve the challenges of meeting the Retirement Income Covenant? Or does this ‘solution’ raise more questions than it answers?
There’s a reason why I find lifetime income streams difficult to understand and write about. And that’s because they are. Yet this third level or ‘bucket’ of retirement income seems to be the preferred ‘next wave’ of retirement funding, as evidenced by the strong support of the Australian Government.
But can these products really be the answer, when so many questions about them remain?
I approached this article with a rather contradictory attitude.
Firstly, a hunch that the emphasis on lifetime income streams as a way to solve many retirement income issues for ordinary Australians was misplaced. And secondly, a determination to ignore this hunch and to try to explore these products with as open a mind as possible; to better understand if they do indeed meet the ‘fear of running out’ and will therefore become a valuable part of the retirement income system.
The Government push
Lifetime income streams have been in the news a lot lately. These ‘longevity protection products’ are described as a ‘central component of … retirement income strategy’ in the not-so-secret Treasury draft paper on ‘best practice for superannuation retirement income solutions’. They are also part of a ‘big push’ by the Grattan Institute for government guaranteed products in its recent Simpler super: taking the stress out of retirement report.
The subtext here is that the greatest fear of retirees is running out of money and so they won’t spend what they could. Or, by refusing to spend enough and leaving overly large bequests, retirees are deliberately ‘gaming the system’. Ergo, guaranteed income through a product that is largely spent down while they are alive must be the solution.
But this emphasis on lifetime income streams as a fundamental part of retirement income is erroneous. It pushes retirees straight to step five of a logical retirement income journey, without first securing steps one to four - those most relevant for about 70% of Australians. These steps are:
- understanding super
- understanding how super combines with an Age Pension,
- understanding work options after 60 and how work income can affect both super and Age Pension entitlements, and
- knowing how the family home can also be accessed as a source of funding.
Each one of these four steps is interrelated, so there is a lot to understand here. In reality, they represent Retirement Basics #101. And that’s before contemplating the later life need to contribute to aged care, whether at home or in a residence.
So how can any single specific income stream really be ‘the answer’ to all the various challenges throughout a long retirement journey?
Further questions about lifetime income streams were usefully identified by Professor Ron Bird in an article published in Firstlinks on 12 February. One of his main concerns is that there is a distortion of forced accumulation and spending, asking why Australians should be forced to spend to a certain level if they ‘just don’t want to’? Professor Bird’s conclusion is that "our current system is able to adequately fund retirement, but it is not working to the lifetime benefit of all."
Running the numbers
As part of my preparation for this article, I approached two product suppliers and asked them to run some numbers for me on a fictitious couple, Barbara and John, aged 70 and 78, who had about the median amount of super ($400,000) and received a full Age Pension. The plan was to test how an investment of half the amount in their Account-Based Pension (i.e. $200,000) would work in an annuity or lifetime income stream.
It didn’t work that well. To be fair, it was probably not a useful example as the assets of this couple were too low. I had hoped for an apples with apples comparison, but the two different companies were offering different solutions, with different features, so I am none the wiser. I’m grateful to Patrick Clarke from Genlife and Aaron Minney from Challenger for running calculations and explaining the many different benefits and variations. And both sets of calculations showed a reliable annual income of between $11,000 - $14,000 for the couple through to their 90s. Did one product offer a better outcome than the other? Not as far as I could ascertain, it depended on too many different factors. And therein lies the problem.
The one thing I do now clearly understand now is why these product providers insist their products are sold by a financial planner. They are just too complex for most retirees to make sense of by reading a PDS or researching online.
It also occurred to me as I struggled to understand the many details of these income streams that the $200,000, if left in an Account-Based Pension, might just earn more and be less trouble and more accessible while still able to be left to nearest and dearest.
I also asked independent analyst, Harry Chemay, how he thought an everyday retiree might compare lifetime income streams or annuities:
‘The problem is that these products are complex by nature and require a level of explanation that is often hard to convey purely online. It is thus hard for retirees to compare the features and benefits of different products to determine if one might be appropriate for their circumstances.
A further complication is that these products may interact with and impact the Age Pension benefit, and understanding how is vital to any individual or couple considering a lifetime income stream. Because of the complexity involved, people may need to seek financial advice on whether and how lifetime income stream products should be considered in their retirement planning.’
Another problem is whether there is a potential conflict of interest when white label products are positioned as ‘chosen’ by a fund and promoted as a single choice lifetime income stream solution without offering any other similar comparisons?
But not every retiree really wants to manage their own money and that’s a good call to make if they do not feel up to the task of ensuring their own best returns over the long years of retirement. Some individuals are keen to achieve a guaranteed income and lifetime income streams can offer this low-risk income, with the added benefit of favourable Centrelink treatment.
So, where have I landed?
I now know a lot more about lifetime income streams, but not enough to say I understand them well. Sadly, the more I learned, the more questions arose.
I can see why they could be appealing to those wanting the ‘problem’ of managing their retirement income to simply go away. But as per my less than useful example of Barbara and John, you have to have sufficient assets to make the exercise of evaluating them with a financial planner worthwhile.
Regardless, the main problem hasn’t gone away. Retirement funding is still a compulsory, largely ‘hands-off’ system where someone else will manage your funds for you for the 40 or so years of accumulation. And then, with little in the way of warning, support or preparation, you’re tossed out on your own to manage and navigate the five separate pillars of retirement income during 30+ years of decumulation. And, worse still, to understand how these pillars can combine in the most tax-effective, risk-controlled way.
I still believe that the most urgent need right now is a three-step educational program which offers:
- prompts at trigger ages and stages, commencing at age 50
- training in how super and the Age Pension combine, before preservation age, delivered by workplaces and local councils
- reminders of your broad options as you age, including what to read, who to see, who can help?
Only when we have successfully supported a majority of Australia’s retirement cohort to fully understand the way their super, savings, work and home might combine with an Age Pension, will today’s retirees have the basis for understanding the many features of lifetime income streams as an add-on layer to their Account-Based Pension.
Which means, there’s a long, long way to go.
Kaye Fallick is Founder of STAYINGconnected website and SuperConnected enews. She has been a commentator on retirement income and ageing demographics since 1999. This article is general information and does not consider the circumstances of any person.