The last two years has seen the emergence of a new category of lifetime annuity. Five providers have now launched lifetime income stream products that are investment-linked. This new era of lifetime income streams offer more income, more choice and more flexibility.
In 2017, the Government passed a series of amendments to a number of regulations, including the Superannuation Industry Supervision Regulations and the Income Tax Assessment Regulations, to enable life insurers and superannuation funds to “provide flexibility in the design of income stream products to meet consumer preferences while ensuring income is provided throughout retirement”¹.
Innovative Income Stream products that met the requirements of the new measures would enjoy the same tax concessions and social security concessions as “traditional lifetime annuities”. One key change was that lifetime annuities no longer had to guarantee the level of income or experience a reduction in income to enjoy these concessions.
Superannuation funds and life insurers have taken advantage of this legislation to offer innovative lifetime income streams with features and flexibility that were not possible under the old regime.
Combining a lifetime annuity with an account-based pension, and if eligible, the Age Pension is an optimal way to address inflation risk, market risk and longevity risk. The right combination can also optimise retirement outcomes and encourage retirees to spend retirement savings rather than save their retirement savings. This gives retirees the confidence to spend knowing they won’t run out of money.
Advisers now have a greater choice of lifetime income streams, many of which offer the potential for more income combined with more choice and flexibility.
A common feature of the new category of lifetime income stream products (collectively called lifetime annuities), is that they are investment or market linked. This means that the level of income paid can rise and fall from one year to the next to reflect the return of the underlying investment options. It is recognised that investment-lifetime annuities with the right investment portfolio can be expected to provide income streams in excess of inflation.
Another common feature of many of the new category of lifetime annuities is that they offer a feature known as an “income redistribution rate”. This feature brings forward income into the early years of the annuity in return for discounting future returns. Australian and global studies show that spending retirement declines over time and that retirees are able to and want to spend more in their earlier years of retirement. Lifetime annuities with income redistribution rates offer the ability to provide income streams that can meet these consumer preferences.
Investment-linked lifetime annuities that provide a choice of investment options and the ability to switch between those options also provide the adviser and their clients greater flexibility than traditional lifetime annuities. Traditional lifetime annuities offer clients stable income that either never changes or increases in line with CPI. The trade-off for this stability of income is that there is no ability to change the investment outcome to address changes in a client’s risk appetite or to react to changing market conditions. Investment-linked lifetime annuities also provide the real potential to deliver more cumulative income over the life of the consumer and, as indicated earlier, deliver income streams in excess of inflation.
Generation Life is proud to be shaping the retirement income landscape with LifeIncome, an investment linked lifetime annuity that was launched in 2022. LifeIncome is the only investment-linked lifetime annuity that offers the following combination of features:
29 investment options managed by professional fund managers, with options ranging from active or passive single sector funds to diversified funds
The ability to hold these options in any combination and switch between options at almost any time
A choice of income redistribution rates, which we call LifeBooster
The ability to purchase an annuity with non-superannuation or superannuation monies
A choice of fortnightly or monthly income payments
The ability to nominate a reversionary beneficiary to receive income when the policyholder passes away and to nominate a reversionary beneficiary other than a spouse when non-superannuation money is used
The ability to elect to receive more income as a couple in return for reduced income when one of the couple passes away (called “LifeIncome Flex”)
“Generation Life is proud to offer an investment-linked lifetime annuity that provides such a unique combination of features following the government’s decision to foster more innovative retirement solutions,” says Patrick Clarke General Manager of Retirement Solutions at Generation Life. “The overarching goal of the rules was to provide income stream products to meet consumer preferences and that’s what we’ve aimed to deliver. Consumer preferences differ from one consumer to the next and it is important to have lifetime annuities that, when combined with an account-based pension in a tailored way, can meet these preferences.”
Over the next decade it's likely financial advisers will become even more important in building client wealth while helping with decumulation of wealth and enjoying retirement. With over 5 million Australians reaching retirement in the 2020s² it’s time for financial advisers to help their clients live the retirement lifestyle they desire with the new era of lifetime annuities offering more income, more choice and more flexibility.
Another risk advisers can help their clients avoid is “Regret risk”. Studies show that many Australians have not lived the lifestyle in retirement that they deserve. They’ve saved their retirement savings rather than spent them. They’ve gotten to an age where they can no longer spend their retirement savings as they’d like and they look back with regret on lost opportunities. A lifetime annuity combined with an account-based pension can address this risk by encouraging spending because the client knows that they won’t run out of money.
The needs and preferences differ from one retiree to the next, and with the emergence of a new type of lifetime annuity, advisers have the ability to combine an account-based pension with an investment-linked lifetime annuity to optimise retirement income. The issues involved in optimising retirement income are complex and multilayered. Very few individuals will be able to manage that process by themselves.
Financial advisers are ideally placed to explain the investment processes, help clients spend their retirement savings, and manage family and estate planning issues, ensuring their clients' sense of obligation to their children doesn’t reduce their own living standards. Financial advisers are trained to understand the right combination of retirement income products to suit a retiree’s needs and lifestyle desires in retirement.
Find out more about LifeIncome, Generation Life’s first-of-it’s-kind investment linked lifetime annuity and how you can help your clients avoid experiencing 'regret risk'. Contact one of our distribution managers.
Speak to your Financial Adviser about how LifeIncome can help you avoid experiencing "regret risk".
1. Treasury Laws Amendment (2017 Measures No. 1) Regulations 2017.
2. Australia Bureau of Statistics May 2020. Retirement and Retirement Intentions, Australia.