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.
As expected, the 2011 Budget announced changes to the very popular KiwiSaver savings initiative which now has over 1.68 million members and is growing at a rate of around 20,000 new members a month. The Government has stated that KiwiSaver is unaffordable in its current form, and in order to reduce government debt, components of KiwiSaver need to change.
What are the changes?
There are three main changes to KiwiSaver that will be implemented progressively:
- The maximum Member Tax Credit (MTC) will be halved from $1 to 50c for every dollar a member contributes, up to a maximum of $521.43 per annum. To be eligible to receive the maximum MTC members still need to contribute at least $1,042.86 per annum.
This change will relate to contributions made from 30 June 2011 onwards, but because the MTC is paid annually in arrears, members will not receive the new MTC amount until after 30 June 2012.
- Currently, contributions from employers of 2% of an employee's gross salary or wages are exempt from Employer Superannuation Contribution Tax (ESCT ). From 1 April 2012, all contributions from employers will be subject to ESCT at the employee's marginal tax rate.
- From 1 April 2013, it is proposed that the minimum employee and employer contributions will rise from 2% to 3% of an employee's gross salary or wages.
Whilst these changes may sound negative, the reality is that KiwiSaver still provides generous incentives and remains a robust retirement savings scheme. All Kiwis who are eligible should actively consider joining, and likewise existing members should not be discouraged by these changes.
KiwiSaver remains a great way to save for retirement. Here are a few reasons why:
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
The Court of Appeal has recently found that a bankrupt's KiwiSaver account cannot be accessed by the Official Assignee.
This means that if you are saving for your retirement you can protect those funds from creditors by using a KiwSaver scheme.
This is a significant finding, If it stands it will change the flow of investment funds in New Zealand, KiwiSaver can now be considered a legitimate asset protection vehicle.
It is also unlikely that money in KiwiSaver schemes will be considered as security by lenders.
No matter how small you believe the chances of you facing bankruptcy you owe it to yourself and your loved ones to consider protecting some of your retirement savings from potential creditors.
There is a chance that a set of unfortunate circumstances outside your control could see you bankrupted. Isn't it wise to consider protecting some of your retirement savings in a legal vehicle sanctioned by the court?
Of course most of us feel a responsibilty to pay all our bills but we also have a responsibilty to protect our loved ones.
Creditors will be still able to access your term deposits, sell your bach, rental property, shares and bonds but they wont be able to get at your KiwiSaver funds.
In the past trusts have been the vehicle most often used to protect assets. Trusts come with all sorts of issues and expenses, may not be tax efficient and can be "busted" and provide no protection if not managed correctly.
Give Bay Financial Partners a call on 07 578 3863 to discuss the options. We can help you access a wide range of KiwiSaver schemes from many different providers.
The Retirement Income Group sometimes uses videos to share useful information.