Retirement that pays

CHOOSING an optimum mix of guaranteed and market linked income streams is the way forward for smart retirees.

Retirement that pays

THE simpler super regime may have sounded the death knell for term-allocated pensions, but lifetime or term annuities still have a place when creating income streams for retirement.

That is of course alongside the new account-based market-linked income streams, which are a reincarnation of the old allocated pensions.

As Macquarie Wealth Management associate director Doug Webber says: "The report of its (lifetime annuities') death has been grossly exaggerated.''

Lifetime and term annuities were long touted as a great way to get around reasonable benefit limits (RBLs) for those with ``too much super'', and eliminate both market and longevity risks.

Now that RBLs and the concessional treatment of complying income streams have been removed, it was thought in some quarters that lifetime and term annuities would die a natural death, as retirees flocked to the new market-linked income streams.

But Peter Nicholas, director of savings and retirement at AMP, who is a "personal fan'' of lifetime annuities, believes they will grow in popularity as a means to guarantee payments for the rest of your life.

Longevity risk, after all, is always an issue no matter how much money you have, and providing a life-long basic income makes sense.

"I think you should take out a lifetime annuity up to an amount that will ensure you will always have enough to buy your basic needs,'' Mr Nicholas says.

"As a result I think we will see the resurgence of the guaranteed annuity as it becomes more of a planning tool.''

More specifically, Steven Travis, head of the member advice centre at Sunsuper, suggests that if you had $2 million in super and wanted to generate an annual income of $80,000 to $100,000 then you should put somewhere between 25 per cent and 40 per cent of your super into a lifetime guaranteed product to ensure $30,000 to $50,000 a year is from a guaranteed source.

This would help give you peace of mind to wrestle with any sharemarket volatility.

Mr Travis then suggests you invest a further 30 per cent to 40 per cent in a balanced, market-linked income stream (which would be invested in 70 per cent growth assets and 30 per cent defensive assets).

With the balance of your money Mr Travis says you should invest it according to your risk profile -- if you are not risk-averse you may look at investing in shares, whereas if you are more conservative a capital guaranteed product may be better.

This is where you pay a premium for the product but through synthetic means your investments are protected against any market downfall.

"In retirement, people want downside protection, so capital guaranteed products will become increasingly important,'' Mr Nicholas says.

This view is echoed by Mr Travis: ``You cannot afford to go for broke in retirement as you don't have the timeframe to afford to wait for the market to recover,'' he says.

"People think differently in retirement with an eye to capital protection and that is why something like infrastructure is appealing as it has good levels of income, is a growth asset but does not have the same volatility as the sharemarket.''

The bulk of retirement monies in super will probably be invested in market-linked income streams.

These are the old allocated pensions that have now been tweaked to comply with the new rulings that say there is a minimum you must draw down every year, but no maximum.

The minimum amount is scaled. It is 4 per cent at age 65 rising incrementally to 14 per cent by the time you are 95.

Market-linked products differ from provider to provider in terms of functionality and flexibility.
Issues you might want to consider include frequency of payments, ease of payments and of course investment options.

For instance, will the income stream be paid monthly, quarterly, half-yearly or annually?

If you are used to a monthly salary, then you may want to continue to receive monthly payments.

Access to funds is also important. Can you transfer money from your income stream straight into your transactional account online, or can you access funds through an ATM? ING recently introduced a pension product that is linked to an ANZ cash management account.

Sunsuper's Mr Travis believes that all providers will be offering this facility within two years.

The more you want to control your investments, the more you will want to shy away from just buying a managed income stream from an insurance company or a financial services group.

This is where the money from many investors is pooled and managed on their behalf.
More control can be achieved by establishing a self-managed super fund and running an income stream from that.

You can either organise your own trust deed and arrange all the administration yourself or use a wrap account.

The beauty of a wrap account is that it takes over the administration while allowing you to invest in a variety of assets, giving you a level of investment control the managed option doesn't.

In the pension environment, investment earnings are tax free in the fund and once you reach 60 income you receive from your pension account is tax-free in your hands.

This generous concession has led to the latest financial planning mantra of getting as much money as possible and practical into super so you can enjoy the tax benefits.

According to Mr Webber, all things being equal, once you have turned 60 you should aim to have as much money as possible in your super and invest it in Australian shares paying fully franked dividends, although leaving some cash aside to meet for your minimum drawdown requirements.

This is pretty much the same argument as from Maggie Callinan, head of research for Financial Facts, who suggests that you should consider how much cash you need for the first five years and put that into conservative investments such as fixed interest.

The balance should then be put into growth investments.

"As you have a five-year time frame there is no need to crystallise any losses caused by volatility in the market,'' Ms Callinan says.

Longevity is always an issue when it comes to income streams. One product launched last year by Asteron was the longevity income stream, which does not start paying out until you are 85 but you have to lock into it before you turn 70.

In those intervening years your money is accumulating helped along by what Asteron terms a longevity boost. The longevity boost comes from a percentage of the monies of those who have taken out the income stream but died before they reached 85.

While the estate will get a percentage of the capital back should this occur, the balance will be redistributed to other income stream owners in the pool, thus boosting their returns.

The legislative risk surrounding superannuation makes many feel uncomfortable to throw all their money into it.

For others there may not be sufficient time given the yearly caps to get all their money into super.
Having funds outside super does not preclude you from taking out an income stream, but of course you won't be able to enjoy the tax-free advantages.

Income streams are only a vehicle to deliver an income to you on a regular basis to simulate your salary when you were working.

It's the underlying investments that hold the key to your enjoying a comfortable standard of living in retirement.