Consider pension as annuity product in retirement planning
The Age Pension should not be regarded as a ‘set and forget' component of a retirement income stream but considered as a government backed annuity with inflation linked increases that provides an income floor according to Lonsec Investment Consulting and Milliman.
Lonsec Investment Consulting general manager Lukasz de Pourbaix said the pension was still the best line of defence for retirees and needs to be considered as an investment asset within holistic advice.
"Putting the pension aside highlights the impact of inflation and volatility on investment returns, which in turn demonstrates the value of the pension," de Pourbaix said.
"What other assets can retirees have in their portfolio that are government backed, inflation linked, act like an annuity and can be used as part of a strategy to alleviate the impact of falling markets."
In a research paper released this week titled "How much is the Age Pension worth?" the two groups state that when combined with investments that are non-affected by investment returns or inflation the age pension provides little value beyond a regular income component for the retiree.
However, when those factors are included the pension has an 80 per cent change of adding to the total lifetime income of the retiree according to the research paper.
The pension is able to perform this function as it acts as a stabiliser and provides a floor against sequencing risk while still allowing retiree investors to benefit from the upside of markets according to the report which states the downside protection of the pension is independent of any upside participation in the market.
Milliman senior consultant Craig McCulloch said it was important for planners to actively consider the value of the pension and to ensure that income strategies do not devalue the pension
"Planners cannot make decisions in isolation of the pension when considering retirement income for clients as it can be influenced and even devalued by the actions of a planner or their client. They need to see it exists and understand the properties it can bring to a portfolio," he said
"If it is seen as ‘set and forget' then they miss a trick when compared to taking it as part of the whole and lose the value that the pension brings in dealing with uncertainty around retirement income."
AUTHOR
Jason Spits
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