We now have access to an exciting new product called the Lifetime Income Fund.
For an initial capital outlay you can buy an Income for Life. The amount of income you will receive depends on your age when you decide you want withdrawals to start.
You can elect to receive your income fortnightly or monthly.
The minimum investment is $25,000.
You can start drawing the income at age 60 at which the benefit rate is 4.5%. The benefit rate increases by 0.10% for each year of age at which you start drawing income. Note that the benefit rate is fixed for your life, it does not change once you start receiving income.
In the current environment you may think those numbers sound too good to be true. Perhaps if you understand how it works you'll realise how it can be achieved. In the video below Ralph Stewart offers an insight into the basic concepts of the Lifetime Income Fund.
New Zealanders Can Finally Get Guaranteed Income For Life
Two years and 11 months after the project to bring modern retirement income solutions to New Zealand began Lifetime Income Limited was licensed and approved to issue variable annuities by the Reserve Bank of New Zealand on the 4th of December 2015. Lifetime Income Limited is the only authorised provider of variable annuities in New Zealand. You can read more about Lifetime Retirement Income on their website >> www.lifetimeincome.co.nz
What does Lifetime Income Fund offer?
- The Lifetime Income Fund guarantees to pay you a set amount each month (or fortnight) until you pass away.
- The amount you receive from your Lifetime Income Fund is fixed for life when you purchase the product and depends upon your age when you start receiving the annuity.
- You can have a joint investment so if one partner were to pass away, the full Lifetime Withdrawal Benefit will be transferred to the surviving partner for the rest of their life.
- When you pass away any funds left in your Lifetime Income Fund will be paid out to your estate.
- You won't run out of money because when your Lifetime Income Fund is exhausted an insurance policy automatically kicks in so your fund keeps paying you.
- You can make any number of partial withdrawals from your Lifetime Income Fund - but only up to 20% of your initial investment, more than that will be treated as a full withdrawal.
- You can change your mind and withdraw all your money from your Lifetime Income Fund - with no withdrawal fee.
The minimum initial investment is $25,000 The maximum initial investment is $1,000,000. You can add to your initial investment in minimums of $10,000 up until you start drawing your income.
Lifetime Income Fund Income per $100,000 - after tax and fees:
|Your age when you elect to start receiving money:
||Cash You will get every fortnight For the REST OF YOUR LIFE - with tax already paid!
You cannot start taking money out until you reach the age of 60 but you can invest before you reach 65.
Lifetime Income Fund is another tool in our retirement planning tool box, it doesn't suit everyone but it may suit you. If you would like to discuss the Lifetime Income Fund please ring Andrew or Jonathan on 07 578 3863.
Why should You Consider Lifetime Income Fund?
In New Zealand the Government currently pays a pension to those over 65. Most of us hope it will continue, at least for our lifetimes, and it probably will, but there is no guarantee. We can put aside money for our retirement and hope it's still there when we need it, for as long as we need it. But until now there were no products providing a guarantee of a known amount of income.
KiwiSaver helps build up savings for retirement, but what do you do with it when you get to 65 and want to start drawing on it? What do you do with the money from your KiwiSaver account? The Lifetime Income Fund may be a suitable place for some people to put a portion of their KiwiSaver money when they reach 65.
How long are you going to live? The Government pension will currently pay out until you pass away. Average life expectancy has been increasing generation by generation. Who knows what medical advances are in the pipeline further extending our life span?
Many people end up living frugal uncomfortable lifestyles in retirement protecting their capital and only spending their income, scared that they will outlive their money. Many retired people feel they are being held hostage by the vagaries of interest rates and investment returns.
With a Lifetime Income Fund guaranteeing a portion of your income you might be able to consider giving a portion of your savings to your children before you die. As you'll have a greater degree of certainty that you'll always have another source of income and won't be a financial burden on them later in life.
Investing a portion of your retirement savings into the Lifetime Income Fund will guarantee you have income for life to supplement the Government pension and maintain a comfortable lifestyle without the worry that can come with other forms of investment.
You can open your Lifetime Income Fund at any age and defer the start of your income until whatever age you choose, after 60. If you defer, your investment should grow before you start drawing your income. So your cash return should be higher than in the table below. For example, if you are 67 when you invest but decide to defer your income until you turn 75 you will get income calculated at 6% and hopefully on a higher balance.
Below is a real life example of what's happened to the funds of one of the early investors in the Lifetime Income Fund after just over three months invested.
|Investment Start date
|He was aged
|So the guaranteed tax paid drawn down rate is
|He started getting his Income Payments
|Tax paid income he's been getting per fortnight
|There were seven fortnights from inception to 31 March 2016 so in total he has received tax free income of
|Account value at 31 March 2016 is now:
|How? Because of the performance of the underlying funds his money is invested in being included in his account.
So it's working out pretty well so far!
I'd imagine that the investor is pretty happy, he's had his income and he has a guarantee he'll continue to receive that - for life.
His beneficiaries probably aren't aware of his investment but if he was to pass away they'd be considerably better of than if he'd left the money in the bank. So they shoud be happy.
The company providing the guarantee are also happy as there is more money to pay the income for longer which means they wont have to pay it and they'll make more money. So far it's a win for all parties.
There is no guarantee that the value of his fund will continue to grow. He is withdrawing money out each fortnight at the rate of 5% pa. There will certainly be periods where it will go down, indeed we expect it to go down most periods. However the above example shows how the performance of the underlying investments can more than make up for the fees being charged and income being drawn.
Click here to get more information on the Lifetime Income Fund then call Jonathan on 07 578 3863.
The following is a simple comparison between a 90-day term deposit and the Lifetime Income Fund. The scenario is a 65 year old male (Bob) with $100,000 invested in term deposits and is drawing down 5% per year. Bob is in good health and has a personal tax rate of 17.5%. He uses the draw-down to supplement NZ Super to meet everyday expenses and has additional savings of $300,000.
Bob would be better off in the Lifetime Income Fund than in TDs. Assuming term deposit rates don't increase.
The Cash PIE term deposit rates (1 year) as quoted by interest.co.nz (25th March 2016), highest investment band.
Provider 1 year
Using a simple average across all providers, less tax at 17.5%, to give a net return of 2.71%. We apply a draw down rate of 5% and an earning rate of 2.71% at age 65.
Using the same approach with the Lifetime Income Fund, which like the term deposit is liquid and licensed by the RBNZ. The Lifetime Income Fund has a higher expected earning rate of 3.68% after deduction of fees and PIE tax and guarantees a draw down rate of 5% for life.
Learn more about the Lifetime Income Fund
How is Insured Income better than just withdrawing money from a Term Deposit?
Insured Income (available from Lifetime Income Fund) is similar to a Term Deposit in some ways and different in others. Both investments have their pros and cons.
Let's start with Term Deposits.
While Term Deposit rates are forecast to be low for some time they remain a good investment. Term Deposits are not without risk however. Unlike in most developed countries, term deposits in New Zealand are not insured or guaranteed. In the event of a bank failure, your investment could be used for the greater good. Click here to read more on the Reserve Bank's site.
Term Deposits also pay out interest infrequently; usually quarterly, semi-annually, or annually. This reduces cash flow and makes it harder to budget on a weekly or monthly basis. Lastly and importantly, once your savings in a term deposit have been fully drawn down, your income stops.
Insured Income (Lifetime)
Lifetime enables you to turn a lump sum into a regular income that's insured for life.
Income payments are paid fortnightly and always remain the same, even if markets fall.To offer an income guarantee, the Reserve Bank requires Lifetime to set aside capital reserves to account for each and every investor. These capital reserves ensure Lifetime can honour its future obligations. Individual investors capital cannot be accessed in the event of a financial crisis.
Lifetime’s income payments are paid after-tax and continue for as long as you live, even if your original capital has been drawn down to zero. Term Deposits and Lifetime are investments that cater to different needs. Term Deposits are designed to help you save and Lifetime is designed to help you live. Lifetime addresses longevity risk (how long will you live?) and market risk (irregular income), term depoists do not.
Try out Lifetime's new comparison calculator to decide what combination is right for you,