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New Zealand lagging on decumulation options

New Zealand retirees are turning to rental property because there are not enough products to provide income in retirement, it has been claimed.

Friday, August 28th 2015, 6:00AM 4 Comments

by Susan Edmunds

David Harris, managing director of UK-based consulting firm TOR Financial, addressed the University of Auckland Retirement Policy and Research Centre yesterday.

He said New Zealand was out of step internationally and the Government needed to take the lead on developing more retirement income options, such as annuities, to help people decumulate.

He said without options people would look to “synthetic annuities”, such as rental property. He said affluent retirees who wanted to ensure they had reliable income were pushing up house prices with their property investments.

“A major concern for New Zealand is that you can’t access any longevity products like Australians or Brits can, and I don’t understand why. Why is there no political leadership coming from Government? The Government basically gave up.”

The Retirement Commissioner had not done enough to address the issue, he said. “The Retirement Commissioner is mainly focused on moving up from Wellington to Auckland and pursuing Money Week, Twitter and Facebook and letting other people drift along. There needs to be a focus.  Anecdotal evidence is that the ageing group in the population does not fully understand what an annuity does.”

Fidelity Life was the last annuity provider in the market and pulled out citing a lack of demand. Only three annuity products were sold in New Zealand in 2013 and none since.

But Harris said demand could be built. As it stood, he said banks were not inclined to stoke demand for products that would take KiwiSaver lump sums away from bank products such as term deposits. “A lot of people don’t realise as they age they could outlive their reserves. What is going to happen to your resource pool as you move forward? The only way to offset that longevity risk is with better mechanisms to harness a rate of return that is consistent.”

Lifetime annuity sales have taken off in Australia, increasing from less than $150 million in 2012 to about $425 million in 2013.

A lack of decumulation products had the potential to be a bigger problem than global warming, he said.  “I’m a bit like the canary in the cage ringing the bell, trying to bring national dialogue to the issue. The Retirement Commission notionally has this on her agenda but the Government is saying ‘problem? What problem?”

Tags: annuities decumulation

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Comments from our readers

On 28 August 2015 at 8:49 am David van Schaardenburg said:
Its clear that the market has spoken. This has been to see the market failure of annuity products in the UK and other countries and to learn from that. Annuities have been shown to lock people into a low return where the benefit primarily accrued to product structurer and the annuity salesperson. Consumers have shown a preference for the flexibility and diversity of a progressive drawdown (monthly a/p) from a diversified portfolio which increasingly in the future will be from their KiwiSaver account.There's plenty of great technology around to work out the sustainability of such an approach.
On 28 August 2015 at 10:57 am Paul Brownsey said:
I agree entirely with David. I'm yet to meet a decumulation product which is not designed firstly for the benefit of the product provider. Lots of embedded features provide lots of opportunity for hidden fees. The experience of the UK and the US cant be described without reference to the many fee scandals around annuities (Google "annuity fee scandal" and see what you get).

There are two risks an owner of capital entering the decumulation phase needs to address - live too long and run out of money, or live not long enough and have your funds go not to your heirs, but to the product provider. Product providers tend to focus on addressing the first but not the second.

A good AFA with access to good,inexpensive products would be able to produce a lower cost, way more flexible portfolio than any decumulation product I have ever seen.

Even if " retirees are turning to rental property because there are not enough products to provide income in retirement" - is there some data that supports this? - even if this is true it is a rational choice - the expected value of that investment is superior to the choices. It's called a free market - and the secret dream of every annuity provider (compulsory purchase of an annuity upon retirement) would be the very worst response possible.

A great opportunity here for AFA's (and I know plenty are already doing this) to provide a truly bespoke service that would crush any structured decumulation product that is full of fees.

Is it just me, or do we always seem to get calls for "more annuity products" when interest rates are at historic lows?
On 28 August 2015 at 11:44 am Pragmatic said:
From another perspective: the financial services industry globally (with the possible exception being japan) has been focussed on Accumulation... with little (if any) attention given to Decumulation. For this reason (and some of those mentioned above), annuity products have failed to fly.

I suspect that the blend of low interest rates, volatile markets, and ageing demographics (with an overwhelming desire for preservation of capital) may make a 'new breed' of transparent annuity-type products more appealing.
On 28 August 2015 at 4:00 pm traveller said:
I thought it was compulsory in the UK for a person reaching retirement age and receiving a company pension for a good percentage of it to be put into an annuity. Is that correct? If so, it's now wonder annuities are well used. It would be interesting to know what the annual percentage return would be in today's NZ market if, say, $100,000 bought an annuity. Can someone tell us? Perhaps that would explain some of their unpopularity.Lack of access to capital is also a drawback.

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