Written by Kris Wrenn
Like the very attractive Defined Benefit Schemes of old, thanks to interest rates where they are and to new products entering the market it IS currently possible to achieve guaranteed lifetime incomes of over 10% p/a. Like with Def Ben schemes, you need time on your side, but it is possible.
Back in June last year I wrote an article about the Annuity investment space and how it has evolved in recent years to become far more diversified with Centrelink friendly annuities and also “market-linked” annuities that can bring much greater returns. A few months after I wrote that, a new product launched that in my opinion offers benefits like no other product. It is available under the Hub24 platform and as Hub is a platform under Hudson’s Approved Product List, we can assist clients to invest.
Some facts and characteristics about the product:
- This award winning product was created by a subsidiary of the world’s largest insurance company and one of the worlds largest financial services groups, so is financially backed by a very big player.
- Initially it is a means to invest, be it in personal names, in the form of Super or even Pension phase.
- The initial investment amount (between $20,000 and $5 million) is invested into an Australian and/or Global Index fund.
- At some stage in the future a pre-determined interest rate can be locked in and the balance at the time can be converted to a lifetime income stream. The longer you stay invested the higher the guaranteed return as the rate applied rises every year you keep the investment.
- If you want to cash it in prior to converting to a lifetime income you can.
- If you want to protect yourself from negative returns you can, but you will also limit your potential returns.
- If you want the income to revert to a beneficiary you can, but the return available will be lower.
- If you want it to be Centrelink friendly, it can be, but the return available will be lower.
- There are mechanisms in place to protect you in the event of a premature death.
As you can see from the above, the product works as an investment vehicle, but it also works as a lifetime income provider and the guaranteed interest rates available may truly surprise you.
Let’s do a real time example right away and then I will cover off more of the options and benefits available.
Take an individual age 50, that puts $500,000 into this fund today and invests 50% into the Australian index and 50% into the Global index. (Note – you can put more or you can put less).
Scenario 1 – After just three years at age 53 the investor could start a guaranteed lifetime income of 5.2% p/a. That amount is paid, NOT on $500,000 but on whatever the balance is at the time of starting. So the $500,000 may well be $550,000 or $600,000 at the time of starting. If we assume a very conservative 7% p/a return the starting balance would actually be $612,521, so they would receive 5.2% of that, or $31,851 p/a.
Here’s where it starts to get interesting
Scenario 2 – Let’s say the investor waits until age 60 to commence the lifetime income. In this case the balance would be $983,575 and the lifetime income locked in is 6.95% p/a, having risen 0.25% p/a each year. That’s $68,358 p/a for life (based on a 7% p/a return).
Scenarios beyond age 60 – since the rate achievable rises by 0.25% p/a, it works as follows:
Age 65 – Rate would be 8.2% p/a. Amount would be $1,379,515 and income for life of $113,120 p/a.
Age 70 – Rate would be 9.45% p/a. Amount would be $1,934,842 and income for life of $182,842 p/a.
Age 75 it would be locked at 10.7% p/a
And so on.
Mechanisms to protect you from an early death.
This works in two parts:
1/ First the Growth phase, where a lifetime income has not been started. In this case, the balance at the time of death simply forms part of the investors estate, just like any share or managed fund investment.
2/ The Income phase. The protection here is only early on, and works like this – each time an income payment is made, it reduces the balance you can access and likewise your estate would receive. So for example, take someone at age 60 that converts $1,000,000 at 10% and receives $100,000 p/a. If they die at age 65, they would have $500,000 left for their beneficiaries. The benefit would be depleted to zero at age 70.
As stated earlier, you CAN also name a beneficiary to receive the lifetime income in the event of your death, however it will slightly reduce the interest rate on offer. E.g. For the 65 year old that would have received 8.2% p/a would only receive 7.8% p/a (likewise their beneficiary in the event of their death).
Mechanisms to reduce market volatility.
Investing 100% into the share market isn’t for everyone, due to market volatility. So, the product also offers two forms of protection in this regard:
1/ You can limit your annual negative return to -6%, however you must also limit your positive annual return to 13% in any given year.
2/ You can opt to have NO negative returns, however your annual return from the market is capped at 6% p/a.
If you would like to find out and more and to discuss options with an adviser please book in now. The rates in this article are as 28th January 2024 and will likely change based on interest rates, and the fund managers expectation of future interest rates.