Lifetime income rates a drawcard
A product such as the Retirement Income Group’s Lifetime Income Fund is likely to appeal to investors struggling in a low interest rate environment, one adviser says.
Friday, January 15th 2016, 6:00AM 
5 Comments
by Susan Edmunds
Lifetime was given a licence by the Reserve Bank last month to offer a variable annuity product in New Zealand.
It offers tax-paid lifetime income rates, fortnightly or monthly, of 5% for people aged between 65 and 69, 5.5% for people aged 70 to 74, 6% for those 75 to 79 and 6.5% for older investors.
If the income payments use up the money invested, the fund continues to pay out.
Jonathan York, of Bay Financial Partners, is one of the advisers who have signed up to distribute the product.
He said it would be another tool available to investors.
“Given the changing landscape and falling interest rates and bond yields, if retirees are looking for income, if they can get a steady income over the long term that starts at 5%, that’s a pretty good return.”
He said New Zealanders would still need to get used to the idea of annuities because they were not well understood. Before Lifetime, there was no one offering an annuity product.
Even in a higher interest rate environment they could work because investors could withdraw some of their capital base and put it to work elsewhere, he said.
But he said it would be important that investors understood the potential pitfalls of having too much of their capital tied up in it.
"We have to educate clients about the limitations and restrictions as well as the benefits," York said.
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Comments from our readers
However I think the article is wrong where it says in the penultimate paragraph that an investor must retain a minimum $100,000 investment. The initial investment has to be a minimum of $100,000. Thereafter there is as far as I am aware no subsequent minimum. An investor can make lump sum withdrawals on top of their regular monthly payment, but once these additional withdrawals reach over 20% of the initial investment, the whole investment will be repaid.
More significantly I have also always thought it is misleading to describe the regular receipts received back by the investor (e.g. 5%p.a. if the initial payments are made between ages 65 and 69 inclusive) as "income". They are not income in the normal use of the word - otherwise there would e no need to have the longevity insurance.
The 5%p.a. payment is made up firstly by income in the regular sense, but to the extent that the income is less than payment, the balance is made up of a withdrawal of principal.
It is plain wrong to compare a TD a paying 3.5% interest with a Lifetime paying 5%. In the former case, the capital remains intact. In the latter case in normal circumstances the capital will reduce as some of it will be needed each year to maintain the contracted payment rates.
And as the capital reduces next year's income will be reduced meaning next year's capital withdrawal will be greater. [It is analogous to how a table mortgage is repaid.]
If this capital reduction is not made crystal clear to investors at the outset, I predict some interesting EDRS complaints and outcomes.
We need another word than "income" to describe the annual payment made to the investor.
My contribution here should not be interpreted as slating the product. Rather it is a warning lest the product is mis-sold.
Yes need to be 100% clear on comparisons between investments that return an income on capital and those that provide an income from capital - clear.
Look forward to debating the use of the word "income" at the next SIFA conference. Not sure it is fair to restrict lifetime products from using the term income when so many KiwiSaver providers are offering post age 65 capital draw down options (with out life guarantees) as a retirement income solution. Best Ralph
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