Tackling the retirement challenge Securitor Conference Nathalie Bouquet Head of Technical Services
Disclaimer The information contained in this presentation is current as at 30 March 2012 unless otherwise specified. It is provided by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 ("Challenger Life") or, where shown, by Challenger Managed Investments Limited ABN 94 002 835 592 ( Challenger ) 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 and Challenger Life. 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, products or developments referred to in the presentation. Neither Challenger, Challenger Life 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 of, 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). Challenger is the issuer of interests in the Challenger Guaranteed Income Fund ARSN 139 607 122 and the Challenger Guaranteed Pension Fund ARSN 154 366 568. Nothing in this presentation is intended to constitute an offer, invitation or recommendation for any investment decision. As with all investments there are risks associated with these investments. The current product disclosure statements ( PDS ) for these products are on our website www.challenger.com.au. The relevant PDS, which sets out important information about these products, including the risks, 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 nor Challenger Life is licensed or authorised to provide tax or social security advice. Because these are complex areas, it is strongly recommended that investors obtain professional advice (including taxation and social security advice, if applicable) before making a retirement investment decision. We are not obliged to update the information in this presentation. Where a person acquires or holds a Challenger or Challenger Life product, that company will receive fees and other benefits which are generally disclosed in the relevant PDS. Some or all of Challenger group companies and their directors may also benefit from fees, commissions and other benefits received by another group company. We and our employees, however, do not receive any specific remuneration for any advice provided to investors. 2
Agenda Income construction for retirement Addressing key risks Case study: using a long-term annuity in retirement planning Technical benefits of annuities Centrelink Aged care Tax Estate planning 3
Client s investment structure over time Accumulation versus drawdown phase Point of maximum wealth Accumulation phase - Saving now to spend later Drawdown phase Portfolio construction Income construction 4
What is retirement about? Very different needs to those in accumulation Cash flows that meet living expenses and lifestyle choices Three stages in retirement: active, passive, aged care Most retirees require certainty not volatility What the GFC has brought into stark focus is that negative returns early in retirement can greatly impact your client s ability to meet their goals 5
What does success look like in retirement? Success in accumulation phase easier to measure Maximise wealth through savings and investment growth to spend in retirement How will your clients measure success in retirement? Regular cashflow to meet living expenses Comfortable retirement Certainty that money will last whilst they are alive Not constantly worried about volatility Maximising Centrelink Age Pension benefits Flexibility and access to capital Potential for capital growth Leaving assets to their children 6
Key risks in retirement Three key risks in retirement that advisers must think about when implementing successful retirement plan: Longevity risk Inflation risk Market risk 7
Longevity risk: No-one knows exactly when they will die 100% Probability of Survival 75% 50% 25% 50% chance one member of a couple will live beyond 93 0% 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 Age Male Female Joint Life 8 Source: based on 2008-2010 ABS data with Treasury mortality improvements
Inflation risk Erosion of purchasing power What will you need to fund $1,000 in the future? $4,500 $4,000 $3,946 Impact of inflation on $1,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 0 5 10 15 20 25 30 35 Year 0% inflation 1% inflation 2% inflation 4% inflation $2,000 $1,417 9
Market risk The problem with averages $1,600,000 $1,400,000 $1,200,000 Account balance $1,000,000 $800,000 $600,000 $400,000 $200,000 Retiree A (actual returns and inflation from 1979 to 2011) Retiree B (same returns and inflation, but in reverse chronological order) $0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 Years into retirement 10 Source: Challenger estimates using ABS, S&P/ASX accumulation with UBS and Commonwealth bank bond indices. Assumes retiree draws ASFA standard moderate standard of living $40,407 indexed to CPI each year.
Income construction for retirement The Age Pension deals with the three key retirement risks: Longevity risk Inflation risk Market risk In design terms, the starting point for retirement streams A great concept but just one problem it s not enough! Age Pension 1 ASFA 2 Modest ASFA 2 Comfortable Single $19,643 $21,930 $40,407 Couple $29,614 $31,675 $55,249 11 1. Includes Pension Supplement as at 20 March 2012 2. ASFA Retirement Standard December 2011 quarter
Income Construction for Retirement Age Pension is the basis of most people s retirement incomes In 2011, 68.5% of people aged 65 and over received either a full (40.9%) or part (27.6%) Age Pension * Challenger believes retirees need a further stream of guaranteed income before they can afford the uncertain cash flows and volatility that comes with investing in growth assets An annuity can act as the first layer in building a strong bedrock of income on top of the Age Pension Annuities provides income certainty and can be structured to address longevity and inflation risk *Source: Department of Families, Housing, Community Services and Indigenous Affairs, Annual Report 2010-2011 12
Income construction for retirement Layering income concept Peak spending years Longevity of account-based pension affected by: i. Sequence of market returns ii. Rate of drawdown including one off expenses Discretionary spending Account based-pension Pa Passive Phase Basic needs Annuity / Private pension Age Pension Typically an identifiable gap here Active phase Passive phase Aged care 13
Income construction for retirement Benefits of layering income in a portfolio Assist clients to achieve success in retirement Regular cashflow Certainty money will last whilst alive Some protection from volatility Maximise Centrelink benefits Flexibility and access to capital Potential for capital growth Leave assets to children Strategy dependant Strategy dependant 14
Income construction for retirement Value of advice With all of these issues, there is a big role for advisers in balancing the various layers of a retiree s portfolio: return certainty, liquidity, exposure to growth assets, longevity risk and volatility are all factors Technical strategies how solution impacts Age Pension, aged care, tax and estate planning There is no single, silver bullet solution It involves blending and layering various solutions Important to address emotional aspect of retirement planning by providing peace of mind for your clients 15
Case study creating long-term income - bedrock income in a portfolio Mark and Sandra (both 65) own their own home and have $25,000 personal assets and $10,000 in the bank They each have $200,000 in superannuation They require annual cashflow of $50,000* Strategy 1: Commence account-based pensions for Mark and Sandra Superannuation assets: Mark Sandra Account-based pension $200,000 $200,000 16 *Before tax income
Case study creating long-term income - bedrock income in a portfolio Scenario 1 - strong market returns 17 Source: Challenger Retirement Calculator Assumes: Market returns are based on US historical rates 1951-1990.
Case study creating long-term income - bedrock income in a portfolio Projected retirement income based on strong market returns Income from account-based pension lasts until age 91 18 Source: Challenger Retirement Calculator Assumes: Market returns are based on US historical rates 1951-1990. Portfolio invests $400,000 in account -based pensions. Account-based pension is split 50% growth assets and 50% defensive assets. Assumes a couple, 65-year old male and female, homeowners drawing CPI indexed income of $50,000 in total.
Case study creating long-term income - bedrock income in a portfolio Projected capital value based on strong market returns Total capital at end of age 80: $353,894 19 Source: Challenger Retirement Calculator Assumes: Market returns are based on US historical rates 1951-1990. Portfolio invests $400,000 in account -based pensions. Account-based pension is split 50% growth assets and 50% defensive assets. Assumes a couple, 65-year old male and female, homeowners drawing CPI indexed income of $50,000 in total.
Case study creating long-term income - bedrock income in a portfolio Alternative strategy: Allocate 30% of superannuation portfolio to lifetime annuity The annuity can be represented as a supplement to Age Pension Superannuation assets: Mark Sandra Account-based pension $140,000 $140,000 Lifetime annuity $ 60,000 $ 60,000 Total $200,000 $200,000 20
Case study creating long-term income - bedrock income in a portfolio Projected retirement income based on strong market returns returns Income from account-based pension lasts until age 92 21 Source: Challenger Retirement Calculator Assumes: Market returns are based are based on US historical rates 1951-1990. Portfolio invests $400,000 split 30% lifetime annuity and 70% accountbased pension. Account-based pension is split 70% growth assets and 30% defensive assets. Assumes a couple, 65-year old male and female, homeowners drawing CPI indexed income of $50,000 in total.
Case study creating long-term income - bedrock income in a portfolio Projected capital value based on strong market returns Total capital at end of age 80: $365,992 Plus choice to: - Continue lifetime income streams, or - Commute lifetime annuities at the end of year 15 for $111,000* 22 Source: Challenger Retirement Calculator Assumes: Market returns are based are based on US historical rates 1951-1990. Portfolio invests $400,000 split 30% lifetime annuity and 70% accountbased pension. Account-based pension is split 70% growth assets and 30% defensive assets. Assumes a couple, 65-year old male and female, homeowners drawing CPI indexed income of $50,000 in total. *Based on Challenger Guaranteed Annuity (Liquid Lifetime) PDS dated 21 October 2011
Case study creating long-term income - bedrock income in a portfolio Scenario 2 - weak market returns early in retirement 23 Source: Challenger Retirement Calculator Assumes: Market returns are based are based on US historical rates 1971-2010.
Case study creating long-term income - bedrock income in a portfolio Projected retirement income based on weak market returns early in retirement with all super in account-based pensions Reliant solely on Age Pension by age 81 24 Source: Challenger Retirement Calculator Assumes: Market returns are based are based on US historical rates 1971-2010. Portfolio invests $400,000 in account-based pensions. Accountbased pension is split 50% growth assets and 50% defensive assets. Assumes a couple, 65-year old male and female, homeowners drawing CPI indexed income of $50,000 in total.
Case study creating long-term income - bedrock income in a portfolio Projected retirement income based on weak market returns early in retirement with all super in account-based pensions Total capital at end of age 80: $5,691 25 Source: Challenger Retirement Calculator Assumes: Market returns are based are based on US historical rates 1971-2010. Portfolio invests $400,000 in account-based pensions. Accountbased pension is split 50% growth assets and 50% defensive assets. Assumes a couple, 65-year old male and female, homeowners drawing CPI indexed income of $50,000 in total.
Case study creating long-term income - bedrock income in a portfolio Projected retirement income based on weak market returns early in retirement with 30% lifetime annuity and 70% account-based pension Higher base income to fall back on Approx $35,000 in todays dollars which is more than modest standard of living 26 Source: Challenger Retirement Calculator Assumes: Market returns are based are based on US historical rates 1971-2010. Portfolio invests $400,000 split 30% lifetime annuity/70% accountbased pension. Account-based pension is split 70% growth assets and 30% defensive assets. Assumes a couple, 65-year old male and female, homeowners drawing CPI indexed income of $50,000 in total.
Case study creating long-term income - bedrock income in a portfolio Projected retirement income based on weak market returns early in retirement with 30% lifetime annuity and 70% account-based pension Total capital at end of age 80: $5,364 Plus choice to: - Continue lifetime income streams, or - Commute lifetime annuities within 15 year guarantee period for $111,000* 27 Source: Challenger Retirement Calculator Assumes: Market returns are based are based on US historical rates 1971-2010. Portfolio invests $400,000 split 30% lifetime annuity/70% account-based pension. Account-based pension is split 70% growth assets and 30% defensive assets. Assumes a couple, 65-year old male and female, homeowners drawing CPI indexed income of $50,000 in total. *Based on Challenger Guaranteed Annuity (Liquid Lifetime) PDS dated 21 October 2011
Case study creating long-term income - bedrock income in a portfolio Cashflow in first year: Mark Sandra Total Age Pension $11,362 $11,362 $22,724 Lifetime annuity* $ 3,000 $ 3,000 $6,000 Total (bedrock income) $14,460 $13,911 $28,724 Account-based pension $ 10,448 10,448 $20,976 Cash $ 150 $ 150 $ 300 Total $25,000 $25,000 $50,000 28 *Assumptions: Challenger Guaranteed Annuity (Liquid Lifetime) quote 5 March 2012, $60,000 invested for each spouse, CPI indexed, monthly payments, non reversionary, nil upfront and ongoing service fee.
Case study creating long-term income - bedrock income in a portfolio Strategy outcomes: Provides some level of protection from market falls whilst still enabling investors to benefit from strong markets Lifetime annuity adds another layer of guaranteed income to the Age Pension payable for life Annuity and Age Pension income protected against inflation Challenger Liquid Lifetime annuity allows exit from the investment during the first 15 years Investment and capital flexibility via account-based pension 70% of portfolio still requires ongoing balancing and review from advisers 29
Alternative strategies Non-indexed lifetime annuities May be suitable for clients wanting more income during early stages of retirement Based on our case study, Mark and Sandra would receive combined payments from lifetime annuities of $7,386*. Versus $6,000** in year one for CPI indexed annuity Able to draw lower payments from the account based pension in early years Less income assessed in later years for Centrelink Income Test 30 *Assumptions: Challenger Guaranteed Annuity (Liquid Lifetime) quote 5 March 2012, $60,000 invested for each spouse, non- indexed, monthly payments, non reversionary, nil upfront and ongoing service fee. **Assumptions: Challenger Guaranteed Annuity (Liquid Lifetime) quote 5 March 2012, $60,000 invested for each spouse, CPI indexed, monthly payments, non reversionary, nil upfront and ongoing service fee.
Alternative strategies Fixed term annuities payable for fixed term Challenger offer terms of 1-50 years Maximum term for super annuities is to investor turning 100* Longer terms help address concerns over longevity risk Shorter terms can be selected to help retirees achieve shorter-term goals Income payments generally higher (when compared to lifetime) as annuity payable for known term Annuities can be purchased in the name of a self managed super fund to cover pension payments * The maximum term refers to superannuation annuities with a nil residual capital value. 31
Alternative strategies Challenger Guaranteed Pension Fund The Fund was designed to provide a platform friendly investment that provides the income planning benefits of an RCV0 term annuity which has: A fixed earnings rate until maturity A fixed regular monthly payment paying both income and capital amounts until maturity with no capital value at maturity A fixed maturity date The ability to redeem units at any time prior to the maturity date* 32 * The early withdrawal price (which is calculated using the then current earnings rate and includes an early withdrawal discount) applies with the result that investors may receive significantly less back than they would if they held to maturity.
Income Construction for Retirement Layering income concept within an account-based pension Income needs are met by the regular and certain monthly distributions paid by the Guaranteed Pension Fund. Growth Assets are given time to grow or provide supplementary income. Discretionary spending Income from growth and fixed income assets can be reinvested for long term growth or spent on discretionary goods/experiences Basic income needs Challenger Guaranteed Pension Fund meets account-based pension income needs until maturity Age Pension Rebalance account-based pension to allocate to CGPF at maturity Typically an identifiable gap here 33
Potential planning strategies The Guaranteed Pension Fund has been designed to provide: A platform alternative to a retail RCV0 term annuity An annuity style cash flow to meet the income needs of retirees in pension phase over a fixed period of time The opportunity for higher earnings rates than normal cash funds that traditionally provide the liquidity for payments, and Certainty of cash flows, earnings rate and investment term at the time the investment in the Fund is taken out. These are examples only. It is still important to consider the appropriateness of an investment in the Fund in light of client s objectives, financial situation and needs and to consider all the information (including about risks) in the Fund s current product disclosure statement. 35 35
Technical benefits of annuities Whilst a primary benefit of an annuity is to provide income certainty for part of clients income portfolio, there may be other technical benefits Annuities may receive favourable treatment in terms of: Centrelink Income and Assets Test Aged care income testing Tax Estate planning Annuities must be structured in the right way to take advantage of these benefits 36
Centrelink Assets Test treatment of annuities Annuities are non-account based income streams Formula for Assets Test: Purchase price [(purchase price RCV*) x term elapsed] relevant number Relevant number = life expectancy (LE) or term Determined on six monthly basis from commencement date unless payment is made annually 37 *Residual capital value
Annuity Assets Test example Kristina commences a 10 year annuity with $100,000 and no residual capital value on 1 February 2011. She elects to receive monthly income payments. What will be her assessed asset value for the first 12 months? From 1 February 2011 to 31 July 2011 $100,000 [(($100,000 - $0) / 10) x 0] = $100,000 From 1 August 2011 to 31 January 2012 $100,000 [(($100,000 - $0) / 10) x 0.5] = $95,000 38
Annuity Assets Test example Fixed term annuity Purchase Price $100,000, term 10 years, nil RCV, monthly payments $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 Centrelink Assets Test amount Asset value after 5 years is $50,000 1 2 3 4 5 6 7 8 9 10 Term elapsed 39 Source: Challenger. Based on the Centrelink Assets Test assessment for non-account based income streams
Annuity Assets Test example Lifetime annuities cease to have asset value if annuitant outlives their life expectancy (LE) Only assessed under Income Test in period after person reaches LE Example Bianca (aged 70) commences a lifetime annuity with $300,000 on 1 April 2011. Her LE is 17.42. Assessed asset value after one year (from 1/4/12 to 30/09/12): = $300,000 [(($300,000 - $0) / 17.42) x 1] = $282,778 Assessed asset value after 18 years (from April 2029): = $300,000 [(($300,000 - $0) / 17.42) x 18] = $0 40
Centrelink Income Test treatment of annuities Long-term annuities Term of more than five years unless LE* is less than five Gross annual payment deductible amount (DA) DA = (Purchase price Residual capital value (RCV) Relevant number Relevant number = Life expectancy or term Short-term annuities are subject to deeming Term of five years or less unless LE* is less than five *LE is the life expectancy of the annuitant. 41
Income Test example 1 Ben purchases a 15 year, 3% indexed nil RCV annuity for $150,000. The income in the first year is $12,238*. Deductible amount: ($150,000 0) / 15 = $10,000 Income Test amount in year 1: $12,238 - $10,000 = $2,238 Alternatively, Ben purchases a 6 year, 3% indexed nil RCV annuity for $150,000. The income in the first year is $27,412. Deductible amount: ($150,000 0) / 6 = $25,000 Income Test amount in year 1: $27,412 - $25,000 = $2,412 42 * Challenger guaranteed annuity 1 March 2012, 15 year, 3% indexed nil RCV, monthly payments, nil upfront and ongoing adviser service fee
Income Test - example 2 Deemed income from $150,000 of financial assets: Single: $6,081 Couple: $5,634 Let s compare this to $150,000 in an annuity $150,000 in a 10 year, nil RCV annuity* $150,000 in a 10 year, 50% RCV annuity** $150,000 in a 10 year, 100% RCV annuity*** Income (year 1) $17,220 $13,887 $8,487 Deductible amount $15,000 $7,500 $0 Assessed income $2,220 $6,387 $8,487 43 *Challenger Guaranteed Annuity quote 21/03/2012, 10 year, nil RCV, 3% indexation, monthly payments **Challenger Guaranteed Annuity quote 21/03/2012, 10 year, 50% RCV, nil indexation, monthly payments ***Challenger Guaranteed Annuity quote 21/03/2012, 10 year, 100% RCV, nil indexation, monthly payments
Income Test example 3 Judith (80) commences a CPI indexed lifetime annuity for $150,000. Income payments in the first year are $10,960*. Deductible amount: ($150,000 0) / 10.01 = $14,985 Income Test amount in year 1 is nil as deductible amount is greater than the payment amount: $10,960 - $14,985 = -$4,025 Deductible amount applies even if Judith outlives her LE Unused deductible amount cannot be offset against other income or carried forward for Centrelink purposes 44
Income Test strategies Nil RCV annuities with a term of six years or more and lifetime annuities Favourable Income Test over deeming* Single 3% for first $44,600 and 4.5% for balance above Couple 3% for first $74,400 and 4.5% for balance above Consider clients who: Are assessed by the Income Test Receive Government super pensions plus deemed income Are paying income tested fees in aged care Are unable to contribute to super * This is dependent on deeming rates and the annuity rate at the relevant time. 45
Income and Assets Test Assets Test versus Income Test Couples $40,000 $200,000 $ Age Pension $30,000 $20,000 $10,000 $0 $360,000 $680,000 $ Assets Couples, homeowners Couples, non-homeowners Income test 46 Source: Challenger Assumptions: $20,000 personal assets, all other financial assets subject to deeming. Centrelink rates effective 20 March 2012.
Income and Assets Test Assets Test versus Income Test Singles $ Age Pension $25,000 $20,000 $15,000 $10,000 $5,000 $0 $120,000 $290,000 $610,000 $ Assets Singles, homeowners Singles, non-homeowners Income test 47 Source: Challenger Assumptions: $10,000 personal assets, all other financial assets subject to deeming. Centrelink rates effective 20 March 2012.
Annuity Income Test strategy Joseph (72) and Judith (70) are homeowners with $240,000 in financial investments and $15,000 personal assets They receive Age Pension of $28,204 p.a.* (Income Test) They require $35,000 to cover their basic income needs and would like to maximise the Age Pension Strategy: They purchase a 15 year, CPI indexed annuity for $75,000** Income payment in first year is $6,147 Deductible amount is $5,000 ($75,000/15) Age Pension plus annuity income covers basic income needs 48 *Based on Centrelink rates as of 8 March 2012 **Challenger guaranteed annuity 7/3/2012, 15 year term, nil RCV, CPI indexed, monthly payments, no upfront or ongoing adviser service fee
Annuity Income Test strategy Age Pension outcome in year 1: No annuity 15 year annuity Income assessed $ 9,684 $ 7,456 Age Pension $ 28,204 $29,318 Increase Age Pension $ 1,114 Income strategy: Age Pension*: $29,318 15 Year annuity**: $ 6,147 Total: $35,465 49 *Based on Centrelink rates as of 8 March 2012 **Challenger guaranteed annuity 7/3/2012, 15 year term, nil RCV, CPI indexed, monthly payments, no upfront or ongoing adviser service fee
Annuity Income Test strategy Alternatively, they purchase a joint lifetime annuity (non-indexed) for $100,000 Payments each year are $5,872* Deductible amount is $5,166 (Based on her LE of 17.42) No annuity Joint lifetime annuity Income assessed $ 9,684 $ 5,890 Age Pension $28,204** $29,614 Increase Age Pension $ 1,410 Annuity + Age Pension income = $35,226 *Challenger guaranteed annuity (liquid lifetime) quote 8 March 2012, CPI indexed, monthly payments, no upfront or ongoing adviser service fee **Based on Centrelink rates as of 8 March 2012 50
Aged care Growing area of advice as a result of ageing population Complex area and many clients need assistance to understand fee structure as well as strategy options Often parents of existing clients moving into aged care facility Very important to take into account the health of the client as person s LE likely to be shorter when in aged care facility 51
Annuities and aged care Aged care fees are made up of: Accommodation bond or charge Basic daily fees Income tested fee Accommodation bond or charge plus basic daily fees are set upon entry and do not change Income tested fee is based on income levels and can be reduced via annuity strategies* Must consider commutation value of annuity for estate planning Term annuities may be structured to continue to one beneficiary 52 * This is dependent on deeming rates and the annuity rate at the relevant time.
Annuities and aged care Income tested based on the formula: (Total assessable income Total assessable income free area) x 5/12 Total assessable income includes: Age Pension and other income support payments Income as assessed by Centrelink Deducible amount of annuities do not count for income tested fee Income-free area Single* Couple (each)* Standard and non-standard* $22,700 $22,232 Protected* $20,113 $19,645 Phased* $21,963 $21,495 53 *Source: Department of Health and Ageing Schedule of resident fees and charges: from 1 January 2012 **Various resident classifications determined when individual enters aged care facility.
Income tested fee strategy Betty (aged 80) is a single non-homeowner residing in a hostel. She paid a bond of $220,000 and now has $450,000 in term deposits. Her family would like to ensure she can comfortably meet her living costs whilst maximising her Age Pension and minimising fees. $450,000 deemed to earn $19,581 p.a. Betty s Age Pension entitlement is currently $11,802* p.a. Betty s income tested fee is currently $3,574* p.a. *Based on Centrelink and aged care rates as at 20 March 2012 54
Income tested fee strategy Strategy: Invest $100,000 into a lifetime, CPI indexed annuity $350,000 deemed to earn $15,081 p.a. Annuity payments are $7,000*p.a. (in first year) with a deductible amount of $9,990 (based on her LE 10.01) No income assessed for the Age Pension or aged care Current Lifetime annuity Income assessed $19,581 $15,081 Age Pension $11,802 $14,053** Income tested fee $3,574 $2,637** Saving (in first year) $3,188 55 *Challenger guaranteed (liquid life) annuity quote 6 March 2012, CPI indexed, 6 year, monthly payments, nil upfront and ongoing service fee. **Based on Centrelink rand aged care rates as at 20 March 2012
Income tested fee strategy Strategy outcomes: Cashflow certainty to pay for aged care fees Income from Age Pension and lifetime annuity* = $21,053 Total aged care fees = 17,500 Made up of $14,863 (basic daily fee) + $2,637 (income tested fee) Estate planning: Let s assume Betty passes away at the end of year three The commutation value payable upon death based on interest rates remaining the same is $92,277** Payments received over the first three years is $21,636* Total income payments over the term plus commutation value = $113,913*** *Challenger guaranteed (liquid life) annuity quote 6 March 2012, CPI indexed, 6 year, monthly payments, nil upfront and ongoing service fee **The CV is indicative only and could be materially different depending on actual CPI and interest rates ***Gross of any tax payable 56
Taxation of annuities income payments Superannuation annuities Age Tax free Taxable component 60 and over Tax free Tax free 55 59 Tax free Assessable income less 15% offset Below 55 Tax free Assessable income For those aged 60+ payments not counted as income for the purpose of: Calculating various tax offsets i.e. SATO*, low income tax offset Commonwealth Seniors Health Care Card *Seniors Australia tax offset 57
Taxation of annuities income payments Ordinary annuities Amount added to assessable income based on formula: Gross annual payment deductible amount Deductible amount = (Purchase Price RCV) RN RCV = Residual Capital Value RN = Relevant number (Life expectancy or term) Formula applies regardless of annuity term May assist clients reduce taxable income and qualify for the Seniors Health Care Card if non-pensioner 58
Ordinary annuity tax example Assume John has $500,000 in the bank earning 5% pa This generates $25,000 taxable income per annum Alternatively, he purchases a five year, nil RCV annuity for $500,000 Assessed income in year 1: 3% indexed annuity Non-indexed annuity Total payment $108,204* $114,524** Deductible amount ($500,000/5) $100,000 $100,000 Assessable income $8,204 $14,524 *Challenger guaranteed annuity 13/3/2012, 5 year term, nil RCV, 3% indexed, monthly payments, no upfront or ongoing adviser service fee **Challenger guaranteed annuity 13/3/2012, 5 year term, nil RCV, non-indexed, monthly payments, no upfront or ongoing adviser service fee 59
Centrelink and deceased estates Many clients likely to be in receipt of at least part pension so it is important aspect of estate planning Becoming assessed as single pensioner can greatly impact on Centrelink benefits Person s interest in a deceased estate is an assessable asset However it is exempt until it is received or able to be received Centrelink normally allow up to 12 months from date of death to finalise estate Gifting rules apply if a person: Waives their interest in a deceased estate Directs executor to distribute estate to third party Gives their interest to third party after estate is finalised 60
Annuities and estate planning Ordinary annuities Death benefits must be paid to nominated beneficiaries or to the estate of the deceased if no beneficiary is nominated Beneficiary options not restricted as with super laws Do not have to be classed as dependant Where annuitant is a member of a couple, they are able to nominate a person other than their spouse as a beneficiary to maximise spouse s Age Pension benefits 61
Case study Karl (aged 75) and Amanda (aged 70) are homeowners with $10,000 personal assets $300,000 in a joint term deposit $100,000 in a fixed income managed fund They currently receive Age Pension of $23,959* (Asset Tested) Karl is in poor health and would like to ensure his family is provided for in the event of his death His current will leaves his entire estate to Amanda If Karl dies, all the assets end up in Amanda s name and her pension is reduced to $10,936* Any assets she passes to her children will treated as a gift *Based on Centrelink rates as of 20 March 2012 62
Case study Karl instead invests the proceeds of the managed fund in an annuity and nominates his children as beneficiaries Any death benefits from the annuity pass directly to the children and not via the estate Based on current assets, Amanda would be entitled to Age Pension of $14,836* versus $10,936* if Karl passed away Extra Age Pension income replaces some of the income generated from managed fund or annuity *Based on Centrelink rates as of 20 March 2012 63
Conclusions Providing simple and effective retirement solutions is a high growth market and adds to the advisers value proposition Annuities can provide certainty of income for part of a client s portfolio Annuities add another level of guaranteed private pension above the Age Pension Annuities can offer technical benefits in terms of Centrelink, aged care, tax and estate Advice is critical 64
65 Questions
Disclaimer The information contained in this presentation is current as at 30 March 2012 unless otherwise specified. It is provided by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 ("Challenger Life") or, where shown, by Challenger Managed Investments Limited ABN 94 002 835 592 ( Challenger ) 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 and Challenger Life. 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, products or developments referred to in the presentation. Neither Challenger, Challenger Life 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). Challenger is the issuer of interests in the Challenger Guaranteed Income Fund ARSN 139 607 122 and the Challenger Guaranteed Pension Fund ARSN 154 366 568. Nothing in this presentation is intended to constitute an offer, invitation or recommendation for any investment decision. As with all investments there are risks associated with these investments. The current product disclosure statements ( PDS ) for these products are on our website www.challenger.com.au. The relevant PDS, which sets out important information about these products, including the risks, 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 nor Challenger Life is licensed or authorised to provide tax or social security advice. Because these are complex areas, it is strongly recommended that investors obtain professional advice (including taxation and social security advice, if applicable) before making a retirement investment decision. We are not obliged to update the information in this presentation. Where a person acquires or holds a Challenger or Challenger Life product, that company will receive fees and other benefits which are generally disclosed in the relevant PDS. Some or all of Challenger group companies and their directors may also benefit from fees, commissions and other benefits received by another group company. We and our employees, however, do not receive any specific remuneration for any advice provided to investors. 66