Wanted: better insurance against outliving our savings
Imagine you’re heading into retirement. You’ll get NZ Super, but you also have savings in KiwiSaver or elsewhere. You would like to spend that money over the rest of your life and leave the house to the kids. But — not knowing how long you will live — how can you decide how much to spend each year?
You don’t need to. You can put all or part of your savings into an annuity, which will give you regular payments for the rest of your life, whether you die tomorrow or live to 120. It’s insurance against outliving your savings. What’s more, you don’t have to worry about where to invest the money.
These days only one company, Fidelity Life, offers annuities in New Zealand. But 15 years ago, when my mother bought an annuity, there were about 10 providers. With the first KiwiSavers able to spend their retirement savings in July 2012, I’m hoping the government will encourage companies back into the annuities market.
Annuities work by pooling lots of people’s money in conservative investments like long-term government bonds. The provider makes regular payments to annuity purchasers in proportion to how much each put into the pool.
Most annuities pay out until the purchaser — or the last of a couple — dies. If you live for decades, you win. If you die soon, the company wins — but you don’t care because you’re not around.
Actually, that last bit is an over-simplification. Many people think it would be a rip-off if they died shortly after buying an annuity, so companies often offer guarantees. You accept smaller monthly payments, but they are guaranteed to continue for, say, ten years. If you die earlier, the payments go to your estate.
Another feature that my Mum used was an allowance for inflation. No annuity provider would automatically adjust payments for inflation, because they couldn’t predict inflation rates decades ahead. But you could ask for payments to automatically rise by two or three per cent a year. Your earlier payments were lower, but some years down the track your payments were higher than they would otherwise have been.
Some say such a feature is unnecessary, that it’s okay for the purchasing power of annuity income to decline because people tend to spend less in later retirement. And, in any case, NZ Super rises with wages, so at least some of your income will go up. But others like the idea of higher payments later on, perhaps to cover increasing health costs.
If we get a robust annuities market back again, there’ll be plenty of choices like these.
I should note here that because annuity providers invest the money conservatively, and because they take the risk that many annuity buyers will live long lives — someone in bad health is unlikely to buy an annuity — annuity payments in the past have often seemed low.
However, that’s partly because annuities are taxed unfavourably, and there are other reasons they haven’t worked as well here as in countries like Australia, Canada, the US and the UK.
The Capital Market Development Taskforce, of which I’m a member, recommended that the government look into changing the taxation of annuities and explore other ways to develop the annuities market. The response has been a lukewarm “yes”, but only “as resources allow.”
That’s disappointing. I reckon many thousands of New Zealanders would appreciate the simplicity and peace of mind annuities offer. And you don’t have to be conservative to get into them. I’m thinking of putting a third or half of my retirement savings into an annuity, which would free me up to make riskier investments with the rest.
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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.