Sustainable income streams to support wellbeing in retirement Change and opportunity. Andrew Lowe Head of Technical Services, Challenger

Transcription

1 Sustainable income streams to support wellbeing in retirement Change and opportunity Andrew Lowe Head of Technical Services, Challenger

2 Sustainable income streams to support wellbeing in retirement An evolving retirement income landscape Making retirement income last a long time or a lifetime Tools and resources for advisers

3 Sustainable income streams An evolving retirement income landscape

4 An evolving retirement income landscape Managing Age Pension impact of rebalanced Assets Test changes (1 Jan 17) Age Pension age increases (1 Jul 17) Super contribution rules changed (1 Jul 17) $1.6m transfer balance cap on tax-free super income streams (1 Jul 17) Earnings of TTR pensions subject to super accumulation rate tax (1 Jul 17) Enhanced Retirement Income Streams available (1 Jul 17) CIPRs/ MyRetirement (1 Jul 18)* *Implementation date for CIPRs TBC

5 Enhanced income streams 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

6 Enhanced income streams Review of Social Security means testing of enhanced income streams still outstanding Likely product developments include: Deferred Lifetime Annuities (DLAs) Group Self-Annuitisation (GSA) products

7 Deferred lifetime annuity (DLA) A DLA is a lifetime annuity where payments do not start immediately For example, a DLA may be purchased at age 65 with payments commencing from, say, age 85 and continuing for life Require a smaller investment to produce the same level of guaranteed income as an immediate annuity because of the deferral period Tax-free earnings despite not meeting SIS minimums Allows increased certainty for funding retirement income Declining capital access schedule to apply Payments could be guaranteed or fluctuate with mortality and investment experience

8 CIPRS/MyRetirement The Government has agreed to support the development of Comprehensive Income Products for Retirement (CIPRs) or MyRetirement products CIPR consultation closed April 2017 Implementation not before mid-2018 CIPRs will be mass-customised composite retirement income products Likely a combination of ABP, annuities, deferred lifetime annuities and group self-annuitisation products to manage retirement risks The Government will facilitate trustees pre-selecting CIPRs for members to help guide members at retirement

9 CIPRs/MyRetirement Consistent with Financial System Inquiry recommendation Proposed there would be a limited number of principles-based CIPR requirements Provide minimum level of income that exceeds accountbased pension drawn at minimum rates Provide a stream of broadly constant real income for life (to manage longevity risk) Include a component to provide flexibility to access lump sums and/or leave a bequest Pooling longevity risk is essential to providing higher retirement incomes

10 CIPRs/MyRetirement CIPR product provide broadly constant stream of income throughout retirement mass-customised composite product-designed in best interests of majority of members CIPR framework include soft-default mechanism to ease decision making for individuals provide safe harbour for trustees against not meeting fiduciary obligations Examples of possible CIPRs (extract from Government discussion paper) The cut The stack The wrap Providing a higher and more stable income than account-based pension drawdown at minimum rates Providing flexibility to access lumpy income throughout retirement from an account-based pension A combination of The Cut and The Stack delivering a balance of their benefits

11 CIPRs/MyRetirement CIPRs not intended to replace the need for financial advice While it is intended that CIPRs would be available directly, licensed advisers will be able to advise on CIPRs It would be anticipated that a financial adviser providing personal advice on retirement income products would be required to disclose in the Statement of Advice why their recommended product would better meet the individual s needs over the mass-customised CIPR offered by the individual s trustee(s) CIPRs used by members as a reference point against which to compare alternative products, including through the use of personal financial advice

12 CIPRs/MyRetirement

13 Providing clients comprehensive income streams today Peak spending years Comfortable living Account-based pension Basic income needs Annuity Age Pension Active phase Passive phase Aged care

14 Sustainable income streams Making income last for a long time or a lifetime

15 Longevity A key consideration 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Survival probability 0% Male Female At least one survivor 50% probability that one member of the couple will be alive at age 93 Challenger estimates (2016). Based on Australian Life Tables and AGA 25-year mortality improvement factors

16 How much income in retirement (and when)? Is the Age Pension enough? Single $23, p.a. Couple $34, p.a. ASFA Retirement Standard age ASFA Retirement Standard, March Available from

17 How much income in retirement (and when)?

18 Retirement income approaches Probability-based Safe withdrawal rates Variable spending Income buckets Funded ratio management Product allocation Bond ladders with longevity insurance Floor-leverage rule Managed DC (as DB) Safety-first

19 Safe withdrawal or spending rates Source: Accurium SMSF Retirement Insights Pension strategies for SMSF retiree couple, aged 65, February 2016, Initial safe spending rate (includes income from all investments and Age Pension where applicable) indexed by CPI but drops by 30% on death of first spouse.

20 Income layering Peak spending years Comfortable living Account-based pension Basic income needs Annuity Age Pension Active phase Passive phase Aged care

21 Income for a lifetime for Ben and Nancy Ben and Nancy (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 $20,000 in personal assets and $40,000 in cash and TDs They want retirement income of $60,000 p.a. But they need $41,000 p.a. to meet essentials Current annualised age pension is $12,589

22 How long will Ben and Nancy s income need to last? Estimates calculated using Australian Life Tables with 25 year mortality improvements as provided by the Australian Government Actuary.

23 Ben and Nancy ABP only Source: Challenger s Retirement Illustrator (19/4/2017). 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 4% p.a. Centrelink rates and thresholds as at 20 March 2017.

24 Ben and Nancy Favourable markets (+ 1.25% p.a.) Source: Challenger s Retirement Illustrator (19/4/2017). 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 3.6% p.a. for defensive assets and 7.9% p.a. for growth assets. CPI of 2.5% p.a. Cash and term deposits return 4% p.a. Centrelink rates and thresholds as at 20 March 2017.

25 Ben and Nancy Unfavourable markets (- 1.25% p.a.) Source: Challenger s Retirement Illustrator (19/4/2017). 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 1.6% p.a. for defensive assets and 4.9% p.a. for growth assets. CPI of 2.5% p.a. Cash and term deposits return 4% p.a. Centrelink rates and thresholds as at 20 March 2017.

26 Sequencing risk $1,000,000 $900,000 $800,000 Account balance $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 Retiree A (actual returns and inflation from 1992 to 2017) Retiree B (same returns and inflation, except in reverse chronological order) Years into retirement Source: Challenger estimates using ABS, S&P/ASX accumulation and Bloomberg AusBond indices. Assumes retiree draws ASFA comfortable standard of living for December 2016 $43,358 p.a. indexed to CPI each year.

27 Ben and Nancy Stochastic modelling of ABP Probability of meeting $60,000 p.a. (wants) until 50% chance of survival Probability of meeting $41,000 p.a. (needs) until 50% chance of survival Source: Challenger retirement illustrator (19/4/2017). 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 Ben and Nancy 30% allocation to lifetime annuity Portfolio Account-based pension $420,000 Lifetime Guaranteed Annuity $180,000 Total $600,000 Account-based pension 29% 71% Lifetime Guaranteed Annuity 40% 100% Total asset allocation 50% 50%

29 Ben and Nancy 30% allocation to lifetime annuity Source: Challenger s Retirement Illustrator (19/4/2017). 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 4% p.a. Centrelink rates and thresholds as at 20 March Challenger Lifetime Guaranteed Income quotes as at 19 April 2017 and assumes $90,000 investment each in the flexible income option, monthly payments, maximum withdrawal period and no adviser fees.

30 Ben and Nancy 30% allocation to lifetime annuity Probability of meeting $60,000 p.a. (wants) until 50% chance of survival ABP only ABP + annuity (no indexation) Probability of meeting $41,000 p.a. (needs) until 50% chance of survival ABP only ABP + annuity (no indexation) Source: Challenger retirement illustrator (19/4/2017). 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.

31 Ben and Nancy 30% allocation to lifetime annuity Probability of meeting $60,000 p.a. (wants) until 50% chance of survival ABP only ABP + annuity (no indexation) ABP + annuity (partial indexation) Probability of meeting $41,000 p.a. (needs) until 50% chance of survival ABP only ABP + annuity (no indexation) ABP + annuity (partial indexation)

32 Ben and Nancy Median bequest values Source: Challenger s Retirement Illustrator (19/4/2017). Amounts shown are in today s dollars. Cash and term deposits return 4%, Age Pension based on rates and thresholds as at 20 March Annual payment from ABP is proportionally withdrawn. Challenger Liquid Lifetime annuity (Flexible) first year payment of $5,097 (Ben) and $4,975 (Nancy), partialindexation, paid monthly.

33 Ben and Nancy Reduced wants Probability of meeting wants until 50% chance of survival Maintain wants of $60,000 Reduce wants by 10% ($54,000) The chance of needs and wants being met increased by 54% Probability of meeting $41,000 p.a. (needs) until 50% chance of survival Maintain wants of $60,000 Reduce wants by 10% ($54,000)

34 Sustainable income streams Tools and resources for advisers

35 Part two: Live webinar Exclusive to AFA Roadshow attendees Extension of today s session covering: Retirement income needs and wants Strategies for different clients Wednesday 9 August from1pm 1:45pm How to register Look out for the AFA feedback and make sure you tick receive Challenger s Retirement Toolkit You will then receive an containing the webinar registration link

36 Adviser tools and resources AdviserOnline tools Retirement Illustrator Age Pension calculator Challenger Business Development Team Dedicated state-based Business Development team specialising in retirement income

37 Sustainable income streams to support wellbeing in retirement An evolving retirement income landscape Making retirement income last a long time or a lifetime Tools and resources for advisers

38 Disclaimer. The information contained in this presentation is current as at July 2017 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. 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. 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.

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