Fast track retirement income streams

Australians build up significant amounts of superannuation, investments, property assets and savings to enable them to retire comfortably.

Retirees have the option of taking their superannuation payment as a lump sum payment or as an income.

However, like many other countries, the Federal Government is encouraging people to take their superannuation as income and has offered tax concessions in this regard.

Advisers can help to maximise their clients’ retirement income and manage risk by diversifying income streams and taking advantage of Government tax concessions.

The choice of income streams will depend on financial goals and investment risk profiles.

Diversifying retirement income streams is a way of spreading the risk across a variety of products such as allocated pensions and guaranteed annuities.

The benefit of this strategy is to reduce the investment risk by balancing a portfolio of riskier but potentially higher returning investments with a portfolio of guaranteed investments.

An investment such as a guaranteed annuity can deliver a known income, year in, year out, helping to provide a regular cash flow to cover the fixed living expenses throughout retirement.

A consumer price index (CPI) indexation facility could also be chosen to keep guaranteed annuity payments in line with inflation.

A market linked pension (eg, allocated pension) can provide growth to help fund all variable expenses.

While an allocated pension can utilise a cash or fixed interest component, the income from this is not necessarily guaranteed.

Allocated pensions

Allocated pensions are a type of retirement income arrangement under which an individual invests a lump sum, using their superannuation money, and then draws down an annual pension.

The amount of the pension drawn down takes account of expected cash flow needs and life expectancy.

Unlike a defined benefit pension or annuity, an allocated pension can provide the retiree with continual access to the capital sum invested.

An allocated pension also allows any balance to be passed on to any beneficiaries upon the death of the individual concerned.

Complying annuities

As well as offering various tax concessions in retirement, complying annuities are treated favourably by the Government in assessing eligibility for Centrelink benefits.

Legislative changes to the assets test exemption being introduced on September 20, 2007, provide a short window of opportunity for clients to invest in complying income streams.

The existing 50 per cent exemption that applies to concessional annuities will only continue if purchased before this date.

A complying fixed term annuity is a simple and secure investment that will provide a guaranteed income stream. The retiree is then free from worrying about managing large sums of money.

As a complying annuity is not contingent on market trends, the retiree can also be assured knowing that the value of the income in the annuity will not decrease if there is a stock market crash.

Lifetime annuities provide retirees with another complying income stream option. This unique product provides guaranteed payments for the duration of the investor’s life.

A combination of income streams may produce the best outcome; the retiree can benefit from the allocated pensions with their growth potential in good times (assuming money is placed in shares, property and other growth options) while also benefiting from the complying fixed term annuity in the bad times, while some investment in a lifetime annuity provides a guaranteed income for the whole of the investor’s life.

This method of diversification may provide better protection for the retiree’s investments during their retirement.

Post September 20, 2007, long-term annuities should continue to be an integral component of any balanced retirement planning portfolio by offering valuable payment guarantees.

Diversification

Through the diversification of various income streams the retiree is better able to deal with the unexpected.

Not only is risk reduced, but there are many tax and social security benefits that the retiree can gain by using pensions and annuities.

The income payments from the annuity help fund all fixed expenses in retirement, while income payments from the allocated pension help fund all variable expenses such as furniture, a new car or a holiday.

Obviously, the client’s individual situation should be considered before making any recommendations.

The chart illustrates how a balanced portfolio might be achieved by investing superannuation funds into an allocated pension and superannuation or non-superannuation funds into a complying annuity.

Clive Levinthal is general manager, life, super and investment products at CommInsure .