CommInsure head of annuities George Lytas discusses the key features of annuities and how they can be used by financial planners.
What is longevity risk and how can it affect retirees?
Longevity risk actually is the risk that as a population we are living longer, and then as an individual you’ve got the additional risk that you may actually live even longer than the average. So what that means is you may outlive your retirement assets. The intergenerational report also highlighted this, so retiring at age 70 a male is likely to live another 17 years and a female is likely to live for another 19 years, so we are talking about planning for retirement to age 90 and beyond. So retirement strategies really need to focus on the long term.
What are some of the key differences between allocated pensions and annuities?
Allocated pensions, or account-based pensions is where the majority of retirement assets are invested – over 90 per cent. They’re highly flexible, they give you investment choice and they also allow you to withdraw subject to the terms, but also you can make additional withdrawals or full withdrawals. Now, coming with that is also the investment risk. By choosing the investment options you’re also bearing the investment risk. So if markets don’t perform well your assets can reduce and therefore deplete over time. As well with account-based pensions they provide no longevity protection so there is a risk of outliving your retirement assets. Annuities on the other hand are issued by life companies and they give you a guaranteed rate of return that you select at the outset. They’re also a lot more flexible than what you may think, so you can select from various terms, short term (1-6 years), long term (6-30 years) or for a lifetime. They also provide you with social security advantages and the other benefit of annuities is that if you invest in a lifetime annuity you can also guaranteed payments periods. So if you die early you still get a return of part of the amount that you invested.
What are some of the different strategies advisers can use when it comes to annuities?
One of the key strategies that advisers can use is income layering and what I mean by income layering is that you look at what are the basic income needs that a retiree needs, and then you cover that with guaranteed sources of income. The guaranteed sources of income can be through social security, so a lot of retirees qualify for full or part age pension, so that proves the base level. Then you look at what is the gap to that basic income need, and then you try and match that with the income from the lifetime annuity – so you purchase an income to fill that gap. Then any excess you allocate to an account based pension and that gives you access to growth assets and then you use that to spend on your other non-essential needs.
So that is one strategy, another strategy is around fixed allocation. What I mean by that is an annuity can take the fixed income component of a diversified portfolio. So by allocating to an annuity, you’re guaranteed of the income that you’ll receive. Annuities also pay up to about 100 basis points above what you may be able to get on other cash and securities. The other benefit of annuities is you’re not subject to capital fluctuations, so if you invest in a fixed income security, depending on if interest rates go up or down, the capital value of the fixed income can also change, thus impacting the retiree.
What differentiates CommInsure annuities from other retirement income products?
When you’re investing in annuities you’re looking at investing for the long term so you want to be comfortable and confident with the provider that you’re going with. You want to ensure that you’re going with a trusted brand and someone that has been around for the long term and therefore will continue to pay your income payments for life. With CommInsure we have a strong pedigree, we’ve been around for over 140 years, we’ve been through a range of market cycles, World Wars, depressions, global financial crises, and we continue to protect and enhance the financial wellbeing of our customers.
We also manage our assets prudently. We have over 85 per cent of our assets sitting in cash and fixed income securities. You know that when you’re investing with CommInsure and its annuities that you’re investing with a company that you know, a brand that you know and a brand that you trust.
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