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:||% Return||Cash You will get every fortnight For the REST OF YOUR LIFE - with tax already paid!|
The percentage return and so your income increases by 0.1% for every year of age before you start to receive the income. 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.
How does Lifetime Income Fund work?
The below is just a brief summary of how the Lifetime Income Fund works. You must read the full Investment Statement before you invest which contains the legal explanation of how the fund operates and overrides anything below.
- You complete an application and pay your money to Lifetime Asset Management Limited (LAM). Up to 0.25% may be deducted as transaction costs.
- You get a group insurance policy from Lifetime Income Limited (LIL) held by the independent Trustee that will pay your income if your funds run out before you pass away. This costs 1.35% per annum.
- LAM puts most of your money into a Balanced Portfolio and some into a Cash Portfolio to pay your income and the fees.
- The Balanced Portfolio is pooled with other investors and invested by independent professional portfolio managers, hopefully earning a good return which goes back into your Balanced Portfolio.
- LAM makes sure any taxes are paid, you do not have to do anything regarding tax on our Lifetime Income Fund.
- Your income is paid out of the Cash Portfolio along with the costs of running the fund which will be about 0.95% per annum.
- If there isn't enough money in the Cash Portfolio to pay your income, and the costs of the fund, some money is taken out of the Balanced Portfolio - so the amount invested reduces.
- When you pass away your estate gets back however much is left in the two portfolios - if there is anything left.
- If the amount in your Balanced Portfolio gets to zero before you pass away the insurance policy kicks in and LIL pays your income from then until you pass away.
On average it is expected that the amount invested will earn enough to keep paying investors their income until they die - but no more. But some of us will die with funds left in our account and get it paid back and others will outlive the funds and Lifetime Income Limited will have to take over paying, that's why they get 1.5%.
What are Some of the Risks of the Lifetime Income Fund?
If the returns from the invested portion aren't very good then less is paid out when you pass away (or withdraw) and LIL has to start paying early. LIL will not like that because it will cost them more so they'll keep a close eye on the investment managers. On the other hand if the investment returns are great, LIL doesn't have to start paying out so soon, or maybe not at all and so they'll make more money.
A guarantee is only as good as the people giving it. There is a risk Lifetime Income Limited won't have enough money in the future to pay your income. To help mitigate this LIL are required to keep significant cash reserves and are monitored by The Reserve Bank of New Zealand which keeps an eye on them to make sure they have enough money available to meet their current and future obligations.
Does the amount Lifetime Income Fund pay adjust with inflation?
No. The Lifetime Income Fund pays a fixed amount - it does not adjust for inflation - so the buying power of the income you receive will fall with inflation. Some see this as a flaw in the product, others argue that we tend to spend less as we get older and so reduced buying power is not an issue. Either way it's something to be aware of. An inflation adjustment to the product would have meant a lower payout. You could compensate by saving a portion of the income you receive initially to spend in later years.
What about investing money, currently held in trust?
Lifetime Income Fund investments must be made in the name of an individual, it cannot be held by a trust. There may be unintended consequences of taking money from the trust and investing in the Lifetime Income Fund but there are ways of achieving the desired outcome and keeping within the intent of the trust. If the money is currently held in trust, you should definitely talk to us, your accountant or solicitor before you decide to invest.
If you would like to investigate whether the Lifetime Income Fund is suitable for you please read the investment statement then ring Andrew or Jonathan on 07 578 3863.
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