Capital idea for annuities
There’s no longer any need to gamble on retirement.
Last week, I wrote a cheque for $100,000. It was a strange experience. Partly because it has been a long while since I wrote a cheque, but also because I was, in a fashion, writing the cheque to myself, as I am a director and minor shareholder of the recipient company.
The $100,000 was for an investment. The cheque went to Lifetime Income, a company that has just started to offer a new, for New Zealand, investment product called a variable annuity.
This is a new, much-improved style of annuity – an investment product that gives income to retired people. These are very popular in the US, UK, Australia and Japan) and now they are offered in New Zealand.
To explain a variable annuity, we have to start with the old annuities. Essentially an annuity means the investor gives the annuity provider a lump sum and the provider gives the investor a guaranteed income for life.
They were especially useful for retired people who had cashed up their super policies or sold a business to retire and need to convert the lump sum into a regular income for life.
However, these old-style annuities were something of a gamble. If you lived longer than normal life expectancy, you’d win because you’d keep getting income payments; if you lived less than most the provider stopped paying and kept the lump sum.
Once the investor had handed over the money, the annuity could not be varied.
Of course, on average, the annuity provider had the numbers worked out: actuaries knew life expectancy figures and paid an income based on those figures. Some people would live long and others only a short time.
The new variable annuities are more flexible. They can be varied at any time, you can draw a lump sum from them and, if you do die early, the estate is paid the capital that is left. I am still a long way from retirement, but when I do retire I will have a guaranteed income for the rest of my life of at least $5000 per annum from my $100,000 (ie, 5 per cent). It could be more than 5 per cent depending on when I choose to start the income. The 5 per cent (or more) that is paid includes a part of the capital so the capital gradually reduces over time.
The account will probably be down to zero when I am 80-85 years but, because there is life insurance with the annuity, the income continues as long as I live.
Before the account gets to zero, if I need to draw some capital from the annuity, I can do that. With a varied annuity, retired people can make an investment that gives them steady, reliable income and, in the early days at least, be able to draw on the capital if they need it.