Give tax break to retirement income products: Stewart

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A special tax rate within the PIE regime for investors who convert some of their retirement lump sums to an income product would be more effective than compulsion in New Zealand, it has been claimed.

Monday, May 4th 2015, 6:00AM 5 Comments

by Susan Edmunds

As Britain steps back from compulsory annuitisation, Australia is pondering forcing retirees to purchase retirement income products.

Concerns about rising life expectancy across the ditch have prompted the Financial System Inquiry, headed by David Murray, to suggest pension-holders should be forced to convert some or all of their savings to a guaranteed income.

Ralph Stewart, of NZIG, is developing a variable annuity product in New Zealand.

He said the new breed of annuities being considered in Australia was quite different from what Britain had dropped, with much more flexibility.

"What Australia is proposing, and our product, is very different to what they had in the UK. In the UK the regulator said you've got to do better and the industry was slow to respond. Australia is talking about more of a North American model with flexibility to get the money back if investors need to."

He said as KiwiSaver balances increased there would be a need to give New Zealand retirees options to manage their income.

But Stewart suggested incentives, such as a special tax rate within the PIE regime for people who converted their capital to income, would be more effective than compulsion in this country.

"As long as they do it they would have the special tax rate. If they stop, they lose it."

The cost of providing that incentive would be minimal compared to the cost of KiwiSaver to the Government, he said.

Financial Services Council chief executive Peter Neilson agreed the question of retirement income was going to be a big issue, especially as low interest rates made it hard for people to use term deposits to generate income.

Savers with big balances, and those selling out of the Auckland housing market, needed options to manage their lump sums, he said.

“People who come out of KiwiSaver in 20 years’ time with a couple of hundred thousand will be targets for scam artists. A safe annuity option might be a desirable thing to look at.”

But he said anyone who suggested annuities should be mandatory would experience strong pushback from New Zealanders.

Adviser Robert Oddy said if there were concerns about retirees' ability to manage their money, there should be more focus on financial literacy education.

Tags: annuities FSC Ralph Stewart retirement

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