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Simplicity offers income option

KiwiSaver provider Simplicity has signed a deal with variable annuity firm Lifetime Retirement Income, to provide a new KiwiSaver fund that offers retirees an income for life.

Friday, September 22nd 2017, 5:59AM 4 Comments

It is launching the Simplicity Guaranteed Income Fund, which members can switch to as they approach retirement.

Then they receive 5% of their final KiwiSaver balance for life, from 65. Lifetime’s insurance product covers the longevity risk.

As with Lifetime’s other products, investors who start taking drawdowns later in life receive a higher percentage of their balances as annual income. When investments do not generate enough of a return, investors' capital will be used to meet payments.

The fund will be invested with a balanced asset allocation.

Lifetime founder Ralph Stewart said it had always been intended that there would be wholesale and retail opportunities. The deal with Simplicity meant it was the only KiwiSaver provider who could offer the option, he said.

Simplicity’s is a simpler product than the standard Lifetime income product, with different capital protection mechanisms. It can only be used by an individual, whereas those who invest with Lifetime direct can take out an investment as a couple.

Simplicity founder Sam Stubbs said there was a lack of investment options for retirees. They were limited to low-interest rate term deposits or too-risky investments that offered higher returns.

“The payments are designed to ‘top up’ NZ Super, so retirees can meet their regular living expenses.”

Simplicity will charge $30 a year for the fund, plus 1.6% a year, which is lower than Lifetime’s standard fee. Stubbs said it should be expected to drop as the fund achieved economies of scale.

The fund is invested in a balanced portfolio of 3000 investments in 23 countries: 55% is invested in investment-grade bonds and 45% in local and international shares. Investments are managed by Simplicity as well as Vanguard.

Stubbs said a law change was needed to allow those over 65 to move to new KiwiSaver schemes, so that those who were already retired could take advantage of the new fund.

Tags: investment KiwiSaver Lifetime NZ Super Ralph Stewart retirement Sam Stubbs Simplicity term deposits Vanguard

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Comments from our readers

On 27 September 2017 at 3:50 pm Nomis said:
Hmm... so what happened to being the champion of lower fees? This is an expensive solution when you see through the "complexity".

The fact is that putting cash in a well managed balanced fund at retirement and taking 5% of returns or capital yourself each year is a solid annuity strategy.

By doing so you are saving 1.5% per annum fee (and it's actually a lot more than this when you unpack other underlying fees and tax drag), if you set that aside each year as your "longevity buffer", by the time you are 85 that's circa 40% of the fund (1.5% x 20 compounded).

An adviser or retiree can build one at very little cost with plenty of buffer for longevity - without lining the pockets of a fund manager.

There is a reason that annuities as a product don't generally succeed without being forced by govt policy.
C.O.S.T

On 28 September 2017 at 10:10 am Sam Stubbs said:
Hi COST. Sorry you disagree with the efficacy of variable rate annuities, which are very popular offshore, without Govt encouragement.

There are a few factual errors here, actually quite a few, so let's go through those.

Firstly, there are no hidden costs, or tax drags. 1.6% is the total cost, encompassing our standard (and lowest, by far) management fee of 0.3%. That is all inclusive, and in a PIE tax structure. 1.3% is the insurance fee. That is a fee almost identical to comparable products sold, by the billions, to willing purchasers, by Vanguard in the US.

An annuity strategy requires it to be a lifetime payment, not something where the capital runs out, as you have advocated as an alternative. We have no issues with running down capital as a strategy, but it's not an annuity strategy, because it does, indeed, run out.

Annuities are a bet on longevity, and our calculations indicate that if you feel like you'll live to 91-92 or older, it's a bet you should take. You should consider it also if you want certainty of income, which many do. Your strategy requires constant reinvestment and security selection, which you may be qualified to do, but many aren't.

It sounds to me like you're annoyed that there is choice in the market. This is the first KiwiSaver annuity, and at prices which are amongst the lowest in the world. Contrary to your assertion, these products are very popular in the US, UK and Australia, precisely because they offer certainty of income, and in environments where investors are getting ripped off with low deposits or high fees elsewhere.

Here's to facts, not assertions.
Thanks
Sam
On 28 September 2017 at 11:53 am Nomis said:
There are no factual errors:

First: Is there a tax drag within the PIE because foreign withholding tax cannot be claimed back by NZ investors from Australian based unit funds?

Second:
A client can retire with (say) $100 at 65 and:
Invest that in a balanced fund and have an expected passive annual return after tax of 5.32%, deduct a passive fee of 0.3% and then a 5% of $100 draw and the capital will never run out - it wont even reduce. Test this using conservative long run estimates of 8.75% gross return for equities and 3.5% for Fixed interest, a 60/40 fund and tax of 20% on an average circa 70k per annum income. Take off a 0.3% cost for a passive fee%.
The client will never run out of capital as the draw is less than the return. What are you modelling on your fund return assumptions?

but... what if we had another crsis?
ok lets shock that with a crisis on day one that reduces the capital by 17% (typical of a balanced fund in a shock) - and lets just say that markets do not revert to fair value post crisis (They HAVE reverted in every post war crisis)- the capital does not run out until the client is over 100 years old.

Fact 3: the annuity is not guaranteed,
there is credit risk on the solvency of the company writing the insurance, even after reserving.

Fact 4: It was compulsory in the UK until 2015 to buy an annuity. Since then people have been voting with their feet with a collapse in demand. A good Financial Times article talking about this is here:

https://www.ft.com/content/8c49099a-efb3-11e6-ba01-119a44939bb6

It is a well accepted fact that Annuities in Australia have not been popular and there are only two main providers with a $2 trillion pension pot - because they are expensive ways of managing longevity risk (as I have provided a simple model to illustrate)

So that's the facts and the reason annuities have struggled in Australia and in the UK post 2015 is because of
C.O.S.T.

On 28 September 2017 at 2:01 pm Brent Sheather said:
Hi Sam

Saw your reply to Nomis and I’m a bit confused now. You say there are no hidden costs and 1.6% is the total cost made up of “our standard management fee of 0.3% plus a 1.3% insurance fee”. If that is the case what is in it for the other party - Ralph Stuart’s Lifetime Retirement Income? If the 1.3% insurance fee includes some margin payable to Lifetime how much is insurance and how much is the margin? You also make the point that the fee is almost identical to products sold by Vanguard. Do you have any numbers as to how identical that fee is?

Thanks and Regards
Brent

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