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Give tax break to retirement income products: Stewart

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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Comments from our readers

On 4 May 2015 at 12:10 pm Brent Sheather said:
Probably the best way of improving outcomes for retired investors would be a price cap on products … I am thinking 10 basis points.

On 4 May 2015 at 4:08 pm Pragmatic said:
@brent sheather: Don't confuse price with value
On 5 May 2015 at 1:45 pm John Milner said:
I'm impressed Brent. You actually run your advice business on 10bp's?
On 6 May 2015 at 11:28 am Brent Sheather said:
Hi Pragmatic
All the academic research says that the best indicator of future returns is low fees, by asset class obviously. If we had reasonable CPD in NZ we wouldn’t be having this discussion!

Hi John
If we had the volume of money that is in some Kiwi Saver products I’m sure we could do 10 basis points. But with $700m we make a good living from an average of 25 basis points. As you know Vanguard offers lots of products at around 10 basis points. My point was that everybody seems to suggest lots of ways in which Mum and Dad’s retirement could be improved without addressing the obvious one and that is the fact that fees are much too high. We would probably get some action if the government super fund was managed by one financial advisor I am aware of that charges a monitoring fee of around 200 basis points.

On 7 May 2015 at 12:41 pm John Milner said:
Thanks Brent. A tongue in cheek comment made by me with 10bp's.

We are on the same page regarding institutional fees. The public are getting well done over. A study last year showed no evidence of any KiwiSaver scheme providing any meaningful value above the market. Yet charge as if they can and do. A large Australian company BDM visited me last week offering a wonderful range of products ranging from 110bp's to 180bp's. Same old stuff with the expectation of somehow creating a different outcome for my clients.

I think I'll stick with my 50bp offering and work on getting it lower with the likes of Vanguard, etc

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