Slow drip for TAPs market

Julie Lockeridge sold her first term-allocated pension (TAP) to an elderly Queensland couple.

The couple weren’t in very good health. The wife spent two days a week hooked up to a dialysis machine. But they did own a house; a big place on Runaway Island worth a couple of million dollars. They had relied on social security benefits to fund their retirement right up until they stepped inside Lockeridge’s Gold Coast practice.

“They were asset rich but income poor,” Lockeridge says.

“They were really caught up in the culture of Centrelink, because that’s where their retirement income had been funded.”

Lockeridge thought if anyone could benefit from a TAP, this client could.

“I had to come up with a strategy that would give them part Centrelink support so they could keep on top of their health care costs and get all the other health benefits you receive when you’re on social security.”

So she put the couple’s $350,000 into a TAP. “They were very happy,” she says.

It’s been almost six months since advisers got the chance to sell TAPs — the new investment product hailed at many a salubrious September 2004 launch party as the best thing for retirees since Zimmer frames.

But even with retirees like Lockeridge’s clients giving them the thumbs up, TAP sales have been relatively low.

Latest Plan for Life figures show that sales languished at only $44 million by the end of the December 2004 quarter.

Colonial First State (CFS) has sold the most TAPs by far ($18 million) with ING next ($8 million) and AMP ($5.3 million) close behind.

“I am aware that CFS was ahead of the pack, but there certainly wasn’t an enormous trend into the product over the December quarter,” CFS technical services manager Deborah Wixstead says.

ING head of fund management product Inbam Devadason says ING sold just 73 TAPS for the three months to December.

However, Lockeridge says she’s in the business of selling retirement income products and, hence, sells a lot of them.

But apart from the couple at Runaway Island, how many TAPs has she sold since September 20? Just one.

Last September, Investment and Financial Services Association (IFSA) head Richard Gilbert, who with Macquarie technical services manager David Shirlow has been described as one of the fathers of TAPs said, perhaps tongue-in-cheek, that they were up there with the Hills hoist as one of Australia’s greatest inventions.

It was at about this time that IFSA produced a survey of 35 fund managers that predicted $2 billion worth of TAPs would be sold by June 2006.

It doesn’t take a genius to figure out that $44 million doesn’t go very far to making $2 billion.

Nevertheless, most fund managers and industry heads aren’t alarmed. They are confident that TAPs — the only income stream to let retirees claim social security benefits and ride investment markets at the same time — will have their day.

They believe that once advisers get their heads around the product, and the dust settles from recent record annuity sales, TAPs will flourish.

“It’s too early to make a conclusive decision on whether TAPs have taken a grip yet,” Gilbert says.

“Thanks to sales of old annuity products going through the roof, there’s been a lot of absorption of future sales.”

What Gilbert is talking about is the phenomenal sales of one of TAPs two competitors in the retirement income stream market.

According to Gilbert, some companies sold four years worth of complying annuities in the lead up to September 20, 2004.

The rush to purchase annuities was triggered by the September 20 lowering of the asset test exemption for complying annuities from 100 per cent to 50 per cent.

Recently released Australian Prudential Regulation Authority (APRA) figures back up Gilbert’s claims, as do first hand accounts from advisers.

“We were very busy selling annuities for months before crunch time. In all seriousness, we were nearly working around the clock,” Lockeridge says.

Wixstead adds: “I’d say that is part of the reason for there not being big buckets of money pouring into TAPs.”

Both Lockeridge and Wixstead believe they will sell more TAPs as new retirees, who weren’t part of the September annuity rush, start to come into the market.

“It’s hard to say how long that’ll take, but my guess is about 12 months,” says Lockeridge.

Wixstead agrees: “We were even bringing the client’s retirement forward if they had been planning to retire in, say, a 12-month period after September 20.”

Wixstead says sales may start to build at the start of the new financial year when there is traditionally a pick-up in retirement income products sold anyway — mainly for taxation reasons.

Another reason why TAPs haven’t burst out of the stalls, according to Aviva technical services manager Tim Cobb, is because there are still some advisers who don’t know how, or are too afraid, to use them.

“That’s probably the biggest question we’ve been getting from advisers,” Cobb says. “Planners ask ‘when should I use these things and how should I use them with other products to get the best returns for my clients?’ I think in 2005 we’ll see more education on how they should be used and then I think we’ll see general upward trend in their use.”

Cobb says sales of Navigator TAPs are growing strongly with $5 million of business written in the first few months of 2005, which is usually a quiet period.

In the longer term, there is another factor that could keep TAP sales increasing. The industry believes TAPs will appeal to two types of retirees: those who still want to receive social security benefits; and those who want to avoid paying higher taxes if they exceed the higher pension reasonable benefit limits (RBLs).

So far, the majority of clients buying TAPs have been of the first variety. Both TAPs sold by Lockeridge were to asset test-sensitive clients.

Another adviser, Stuart Jones, has sold a few more TAPs than Lockeridge since September 20.

“Clients are either slightly over the asset test threshold or slightly under it and are looking to maximise Centrelink entitlements. That’s predominately the purpose they’ll be using those types of investments for. I did one for RBL purposes when they were launched last year, but that’s the only one so far.”

ING’s Devadason says the average value of the 73 TAPs ING sold was about $110,000.

This not only indicates that the majority of TAPs were sold in conjunction with an allocated pension — their average value is about $185,000 — but also that ING has had few clients looking to avoid higher pension RBLs.

According to ING technical services manager Andrew Lowe, these clients will only benefit significantly from a TAP if they have well in excess of the lump sum RBL of $619,223.

But all this could change, Devadason says. With employees now receiving super throughout their working lives, many future retirees will be sitting on far healthier lump sums. This will lead to more people looking to combine a TAP with an allocated pension to avoid the higher pension RBLs and, because these clients have big bucks to invest, that will mean more money for TAPS.

So it looks as if the market for TAPs will improve. But what of annuities?

With the 100 per cent asset test exemption now reduced to 50 per cent, will anyone want to buy an annuity over a TAP?

“There will always be a place for annuities,” Gilbert says.

“Some people want the provider to take all the risk.”

Jones says unless a client really pushes for an annuity, he’ll be more likely to go with a TAP.

“There’s more flexibility in a TAP from an adviser’s point of view to structure an investment portfolio that will outperform fixed interest.

“Sure, the fixed interest has benefits as well with regards to capital security and guaranteed rates of return, but with the fixed interest market at the moment producing pretty low returns, it’s fairly easy to find investments that give a better overall result.”

“Why would you take the cash rate?” asks Lockeridge, who posed the same question to her clients from Runaway Island.

“Sure, if interest rates go back up over 10 per cent, annuities might make more sense. But until then, why not try a TAP?”