Change and opportunity: Pre and Post Retirement strategy in focus. Andrew Lowe, Head of Technical Services, Challenger

Transcription

1 Change and opportunity: Pre and Post Retirement strategy in focus Andrew Lowe, Head of Technical Services, Challenger

2 The changing legislative environment Retirement income Managing Age Pension impact of rebalanced Assets Test changes (1 Jan 17) Super contribution rules and $1.6m transfer balance cap on super income streams (1 Jul 17) Enhanced Retirement Income Streams available (1 Jul 17) Downsizer and unused concessional contributions (1 Jul 18) Super work test exemption (1 Jul 19)* Expansion of Pension Loans Scheme (1 Jul 19)* New means testing of lifetime income streams (1 Jul 19)* Retirement Income Covenant and CIPRs (1 Jul 20)* * Not yet legislated

3 Enhanced retirement income streams Increased income options for retirees An additional set of income stream rules (new category income streams) increasing flexibility for retirees available since 1 July 2017 No requirement to satisfy SIS minimum payments Classified as retirement phase income streams and qualify for tax-free earnings after a condition of release has been satisfied Subject to a declining capital access schedule Limits lump sum commutations and death benefits but does not restrict income payments

4 Enhanced retirement income streams Declining capital access schedule

5 Enhanced retirement income streams Including Deferred Lifetime Annuities (DLAs) Lifetime payment v DLA (65 year-old male) Annual payments (CPI indexed) $30,000 $20,000 $10,000 $ Years in retirement Immediate lifetime annuity DLA (20 year deferral) Note: Challenger Liquid Lifetime quote as at 21 May 2018, regular payments indexed with inflation of 2.5%p.a., nil adviser service fee and maximum withdrawal period of 18 years for males and 21 years for female, a death benefit of 100% of the initial amount invested for the first 9 and 10 years respectively after which time the death benefit is equal to the maximum voluntary withdrawal value. PDS available from

6 Downsizing super contribution Key facts

7 Unused concessional contributions Key facts Total super balance includes accumulation phase balance, adjusted transfer balance account, balance of account-based income streams, rollovers in transit less structured settlements.

8 Unused concessional contributions Case study John and Mary are aged 60 and currently have a jointly owned holiday property John is earning $40,000 p.a. retiring in June 2020 and Mary is retired They are intending to sell the property in July 2020 (they estimate for $600,000) to boost their superannuation. They have advised that their cost base is $150,000 meaning each would realise a gain (after 50% discount) of $112,500 each At present they both have $200,000 in super How could they utilise the unused concessional contribution rules?

9 Unused concessional contributions Case study Assumption: Salary, rates and thresholds remain unchanged and superannuation balance remains below $500,000 for the illustration period

10 Superannuation Introducing a work test exemption From 1 July 2019 the Government will introduce an exemption from the super work test: For individuals aged With a total super balance of less than $300,000 For 12 months from the end of the financial year in which they last met the work test Subject to existing concessional and non-concessional caps

11 Expansion of the Pension Loans Scheme Improving income in retirement From 1 July 2019 the Government will expand eligibility of the PLS to all Australians of Age Pension age Under the PLS fortnightly payments are available to supplement income Payments are drawn down from equity in a property and accumulate as a debt with interest Payments are non-taxable and generally not means tested Repayments are generally made from eventual sale proceeds of the property Increase maximum combined Age Pension and PLS to 150% (from 100%) of the Age Pension rate Full-rate pensioners will be able to increase their income by up to $11,799 (singles) or $17,787 (couples) per year

12 Means testing of lifetime income streams Clarity, certainty and a foundation for new retirement income streams New rules for lifetime income streams purchased from 1 July 2019 Assets Test: 60% of purchase price assessed until age 84 (min 5 years), 30% thereafter Income Test: 60% of all lifetime income stream payments assessed Lifetime income streams purchased prior to 1 July 2019 will be grandfathered under the current rules No change for term and account-based income streams This measure was announced in the Federal Budget. It is not yet legislated and may be subject to change.

13 Means testing of lifetime income streams Clarity, certainty and a foundation for new retirement income streams Additional rules apply to lifetime income streams that offer surrender values and death benefits above the capital access schedule (required for innovative income streams ) The assessed asset value will be the greater of: The standard assets test treatment (60% of PP to 84 (min 5 years) and 30% thereafter); The value of any current or future surrender value; and The value of any current or future death benefit This assessment was announced in a DSS FAQ following the Federal Budget. It is not yet legislated and may be subject to change.

14 Means testing of lifetime income streams Current v New: Assets and Income tests Challenger Liquid Lifetime (Flexible Income) quote dated 10 May This illustrates the Government s proposed change to means testing of lifetime income streams. This measure was announced in the Federal Budget. It is not yet legislated and may be subject to change.

15 Means testing of lifetime income streams Different Age Pension outcomes for different clients Current means test rules Post 1 July 2019 rules Challenger Retirement Illustrator 28/05/2018 (adjusted for proposed DSS treatment of lifetime income streams), 65 year old M/F couple, $300,000 each in account-based pensions, investor risk profile 50% growth and 50% defensive, $50,000 cash and $20,000 non-financial assets. Compared to 25% allocation to Challenger Liquid Lifetime (Flexible Income option). Desired income of $60,264 p.a. (ASFA comfortable) including essential income of $42,000 p.a. Amounts shown are in today s dollars. Investment return sourced from Willis Towers Watson data. Assumes net investment returns (after all fees and charges) of 2.6% p.a. for defensive assets and 6.4% p.a. for growth assets. CPI of 2.5% p.a. Cash and term deposits return 3% p.a. Centrelink rates and thresholds as at 20 March 2018.

16 Retirement Income covenant A requirement to formulate, review and give effect to a retirement income strategy for members Trustees would need to consider: Maximising income for life Potential life spans and costs and benefits of managing longevity risk Managing risks that affect the stability of income, including inflation Providing members with access to capital Member needs and preferences for the factors above Costs/benefits of in-house or outsourcing a CIPR Expected member eligibility for the Age Pension

17 Comprehensive Income Products for Retirement (CIPRs) Composite retirement income products to provide income for life A CIPR is a retirement income product designed to provide: Efficient, broadly constant income, in expectation; Longevity risk management (income for life); Some access to capital Would likely require a minimum investment of 15-20% in a pooled lifetime income product A 100% allocation to an ABP alone would not meet the definition of a CIPR All funds should offer a flagship CIPR to members at retirement, subject to limited exceptions Consent (member) should be required for a CIPR to commence This measure was announced in the Federal Budget. It is not yet legislated and may be subject to change. The Government issued a position paper on the Covenant on 17 May 2019 for consultation (to 15 June 2018). The Government intends to legislate the Covenant by 1 July 2019 but delay commencement to 1 July 2020.

18 A comprehensive income stream today Trent and Tracy Trent and Tracy (both aged 65) are a couple and own their home They have $300,000 each in account-based pensions (deemed) Their investor risk profile is 50% defensive and 50% growth They have $15,000 in personal assets and $25,000 in cash and TDs They want retirement income of $60,000 p.a. But they need $42,000 p.a. to meet essentials Annualised age pension is currently $15, Based on 20 March 2018 Centrelink rates and thresholds

19 A comprehensive income stream today Income for Trent and Tracy might need to last a long time 1 ALT , with 25 year improvement factors. Assumes both persons exactly age 65, calculated at July 2018

20 A comprehensive income stream today And the Age Pension alone is unlikely to be adequate for many Is the Age Pension enough? Single Couple $23, p.a. $35, p.a. Centrelink rates as at 20 March 2018 ASFA Retirement Standard, Mar Available from

21 A comprehensive income stream today Account based pensions based on average fixed returns Source: Challenger Retirement Illustrator (22/03/2018). Amounts shown are in today s dollars. Investment return sourced from Willis Towers Watson data. Fixed return scenario assumes returns of 3.7% p.a. for defensive assets before investment fee 0.6% and platform fee 0.5%, returns of 7.7% p.a. for growth assets before investment fee 0.8% and platform fee 0.5%. CPI of 2.5% p.a. Cash earns 4%. Account-based pension 50% defensive/50% growth.

22 A comprehensive income stream today Retirement capital average net is different to market experience $700,000 $600,000 Account based pension balance $500,000 $400,000 $300,000 $200,000 $100,000 $ Stochastic 1 Stochastic 2 Stochastic 3 Stochastic 4 Fixed returns Age Source: Challenger Retirement Illustrator (22/03/2018). Amounts shown are in today s dollars. Investment return sourced from Willis Towers Watson data. Fixed return scenario assumes returns of 3.7% p.a. for defensive assets before investment fee 0.6% and platform fee 0.5%, returns of 7.7% p.a. for growth assets before investment fee 0.8% and platform fee 0.5%. CPI of 2.5% p.a. Cash earns 4%. Account-based pension 50% defensive/50% growth.

23 A comprehensive income stream today Account based pension outcomes ($60k wants and $42k needs) Source: Challenger Retirement Illustrator (22/03/2018). Amounts shown are in today s dollars. Investment return sourced from Willis Towers Watson data. Fixed return scenario assumes returns of 3.7% p.a. for defensive assets before investment fee 0.6% and platform fee 0.5%, returns of 7.7% p.a. for growth assets before investment fee 0.8% and platform fee 0.5%. CPI of 2.5% p.a. Cash earns 4%. Account-based pension 50% defensive/50% growth.

24 A comprehensive income stream today Combining income streams Retirement Income Portfolio Current Proposed Trent Account Based Pension $300,000 $237,000 Lifetime Guaranteed Annuity Nil $63,000 Tracy Account Based Pension $300,000 $237,000 Lifetime Guaranteed Annuity Nil $63,000 Total Retirement Income Portfolio $600,000 $600,000 Source: Challenger Retirement Illustrator (22/03/2018). Challenger Liquid Lifetime annuity assumes $63,000 investment each in the flexible income option (standard death benefit), monthly payments, CPI indexation and maximum withdrawal period.

25 A comprehensive income stream today Retirement cash flow (constant returns) Source: Challenger Retirement Illustrator (22/03/2018). Amounts shown are in today s dollars. Investment return sourced from Willis Towers Watson data. Fixed return scenario assumes returns of 3.7% p.a. for defensive assets before investment fee 0.6% and platform fee 0.5%, returns of 7.7% p.a. for growth assets before investment fee 0.8% and platform fee 0.5%. CPI of 2.5% p.a. Cash earns 4%. Account-based pension 50% defensive/50% growth. Challenger Liquid Lifetime annuity assumes $61,200 investment each in the flexible income option (standard death benefit), monthly payments, CPI indexation and maximum withdrawal period.

26 A comprehensive income stream today Comparisons outcome from 2,000 scenarios Source: Challenger Retirement Illustrator (20/03/2018). Analysis to 50% chance one person of couple still alive. Portfolios have been tested against 2,000 market scenarios that represent how markets could perform in the future. Market data sourced from Willis Towers Watson.

27 A comprehensive income stream today Estate planning outcomes ($60k wants and $42k needs) Source: Challenger Retirement Illustrator (20/03/2018). Analysis to 50% chance one person of couple still alive. Portfolios have been tested against 2,000 market scenarios that represent how markets could perform in the future. Market data sourced from Willis Towers Watson.

28 Disclaimer Disclaimer. The information contained in this presentation is current as at 5 July 2018 unless otherwise specified. It is provided as shown by Challenger Retirement and Investment Services Limited (CRISL) ABN , AFSL , Challenger Life Company Limited ABN , AFSL ("Challenger Life") and is intended solely for holders of an Australian financial services licence or other wholesale clients (as defined in the Corporations Act 2001 (Cth)). The information contained in the presentation must not be passed on to retail clients. It is presented for information purposes only and is intended as general factual information only rather than as financial product advice. It has been prepared without taking account of any person s objectives, financial situation or needs. Because of that, each person should, before acting on any such information, consider its appropriateness, having regard to their or their client s objectives, financial situation and needs. The information must not be copied or disclosed in whole or in part without the prior written consent of Challenger Life and CRISL. In preparing the information presented, the presenters have relied on publicly available information and sources believed to be reliable, however the information has not been independently verified by the presenters. While due care and attention has been exercised in the preparation of this information, none of the presenters give any representation or warranty, either express or implied, as to the accuracy, completeness or reliability of that information. The information presented is not intended to be a complete statement or summary of the industries, markets, securities or developments referred to in the presentation. Challenger Life is the issuer of annuities under the Challenger Guaranteed Income Plan, Challenger Guaranteed Income Plan (Complying Annuity), Challenger Guaranteed Income Plan (Liquid Lifetime), Challenger Guaranteed Annuity, Challenger Guaranteed Annuity (Complying) and Challenger Guaranteed Annuity (Liquid Lifetime). CRISL issuers interests in the Challenger Guaranteed Income Fund ARSN Offers of interests in these products are contained in the relevant current product disclosure statements ( PDS ) which are on the website The relevant PDS should be considered before making any investment decision. Past performance is not a reliable indicator of future performance. Any opinions expressed in this presentation (including any as to future matters) may be subject to change. This is because outcomes may be affected by known or unknown risks and uncertainties that are not able to be presently Identified. Examples and comparisons used in any presentation are for illustrative purposes only. Neither Challenger Life nor CRISL is licensed or authorised to provide tax advice. Because this is a complex area, it is strongly recommended that investors obtain professional advice (including taxation and social security advice, if applicable) before making a retirement investment decision. No presenter is obliged to update the information in this presentation. Some or all of Challenger group companies and their directors may benefit from fees, commissions and other benefits received by another group company Neither Challenger Life, CRISL nor their related entities, nor any of their directors, employees or agents accept any liability for any loss or damage arising out of the use of all or part or, or any omission, inadequacy or inaccuracy in, the information presented.

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