What’s an Annuity?

In simplistic terms.  Your own ‘pension’.  Purchasable from a financial provider using an investment lump sum accumulated by you.

Are they common in NZ.  No.  Are they readily available in NZ.  No.

Why not?  Because there is no demand.  This will change, and possibly over night, when a future government becomes infuriated by KiwiSaver lump sum pay outs and the progressive cost of inflation adjusted ‘non means tested’ government superannuation – payable from age 65.

Burgeoning welfare payment is a major financial issue with most Western countries.  Various benefits prevail – from unemployment, to ill health, old age, family benefits, education, victim support, parental leave and long term care.  There is no way future governments will continue subsidising savings accumulation (KiwiSaver, State Services Retirement Savings) and allowing defined contribution benefits to mature and be spent as a lump sum.  There will be various political debate – from means testing, to age of retirement, to mandatory annuity purchase.  Determining each particular strategy will be the governmental bias and philosophy of the party, the time and power they have.

It doesn’t seem only 30 odd years ago when pension schemes (both public and private) transitioned from defined benefit to defined contribution.  In other words that’s what we used to have.  Government employees and corporate employees once retired on various pensions – usually an inflation adjusted regular payment the pensioner and their partner could not outlive.

The cost to government and corporate became prohibitive – due predominantly to a) the poor investment (asset allocation) of the funds, b) the ill discipline in use of the investment funds by the corporate or government.  (Used for various other priorities of the day), c) the increasing lifetime longevity of retirees, d) burgeoning inflation through the 70s.  We haven’t completed the circle back to defined benefit (pensions) but we will.  Only – the government will legislate rather than provide.  A portion, if not all lump sums accumulated via a government subsidised scheme will likely be expected to be taken as a draw down facility (a pension).  This will necessitate the purchase of an annuity from a financial institution.  A whole new plethora of products will follow.  Banks will take the market (just as they have with the KiwiSaver product) but other providers will flood the market.  Options will abound.  Confusion will reign.

Whilst one political party will see the necessity to ‘stop people spending their savings’ on personal impulse buying – the other political party will want to means test.  Tax will become a hot topic again and estate management strategies through trusts and various company or residency rules will again prevail.  Over the last 40 years we I have experienced each of these various savings, investment, welfare and tax configurations.  The cycle continues.

It’s time to prepare for these potential changes now – it will be completely inappropriate to wait and see, just as it has been inappropriate for a generation of baby boomers to expect that governments can afford cradle to grave welfarism.  We should be grateful that we live within a progressive society concerned for social order and living standards, but we can’t shake a tree and finance lifestyle and living standards through taxation because someone has to pay.  When we were paying 66 cents in the dollar taxation in the 1970s, it did nothing for productivity – it created strategies determined by antipathy – society will always counter, mandated ‘persuasion’.

Annuities will come – be assured of that, just make sure you select the right advice.  As we always promote – take advice from a specialist, don’t simply buy the product.  Between now and when legislation changes, retirees should develop their own retirement and investment strategy.  It’s called a retirement plan and consists of a balanced approach to cash management, investment portfolio and security of assets through estate management and insurances.  At the moment retirees have the option to arrange their own investment portfolio – some do it well.  Most do not.

The information provided in this blog is not intended to be a substitute for professional advice. You may seek appropriate personalised financial advice from a qualified professional to suit your individual circumstances.