Some revolutions happen overnight while others take much longer.
Buying a superannuation income stream that lasts for your whole life is one that has taken a really long time.
It is true that there have been many products that have tried to do that.
Annuities have been around for a long time but they have failed to become much more than a niche product due to the large amount of money required to buy even a modest income and due to a fairly inflexible design once you are committed.
The current ultra-low interest rates haven’t helped the case for annuities, jacking up the amount required to “buy” an income even further.
Most retirees have resorted to an account-based pension
Many people have resorted to simply letting their super roll along in an account-based pension mode and withdrawing the minimum amount, which is good for keeping your savings invested but reinforces an attitude of living off your earnings rather than withdrawing capital – something that the Australian Federal Government’s recent Retirement Income Review identified as a really big problem.
Due to the fact that nobody can guess how long they will live, many seniors are afraid of running out of money and end up dying with most of their super unspent – leaving it to their beneficiaries.
Treasury has pleaded for new retirement products
The Federal Treasury pleaded with the industry way back in 2016 to come up with an answer to this problem but the revolution has been very slow to arrive.
It may not be the answer for everyone but QSuper’s Lifetime Pension product at least offers some innovation that will hopefully spur much more activity and choice in the superannuation industry.
As the name suggests, the QSuper product pays a fortnightly income for life and is designed to ensure that the retiree or their estate get back your initial investment, irrespective of how long you live.
Money back no matter when you die
If you live a long time, you will get back all that you invested and potentially a lot more in the form of pension payments.
If you die early after buying the pension, the “unspent” capital you put in will be returned to your estate.
You can buy a Lifetime Pension at any time between your 60th and 80th birthdays, with annual rates of income per $100,000 invested ranging from $6,164 to $10,834 for singles.
Understandably that rate falls a little if you opt to insure the life of your spouse as well, given that it keeps the pension going should one of you die.
How does it work?
So how does the Lifetime Pension work, and how does it manage to pay out more in payments than either an annuity or an account-based pension on aged based minimums?
The answer is that the money invested is pooled and invested in a traditional balanced growth option, minus management fees and the cost of insurance for the money-back death benefit.
That means that long term returns should be higher than those invested in fixed interest style investments and have the possibility of increasing the amount paid each fortnight over time.
So, what is the catch?
Well, in common with all financial products there are a few downsides, the major one being that the flexibility of being able to extract lump sums from the amount used to buy the lifetime pension is removed.
Once you are committed to the lifetime pension, there is no going back once the cooling off period is over.
That makes the amount of your super that you commit to the pension very important, depending on the amount of flexibility and the income that is required.
Income can vary – up and down
The other issue is that the amount of the pension can change with investment performance.
Unlike a traditional annuity, which pays fixed or perhaps indexed income for life, this product pays variable income.
Every year the previous year’s income is adjusted based on how the pool performed against a benchmark net return of 5%.
In simple terms if the pool return is more than 5%, the pension will rise in the coming year but if it is less than 5%, the pension will be cut.
This adds a little bit of unpredictability, although that is the price you probably have to pay to access the returns and higher income that is available through a more market linked approach compared to an annuity.
Over time, you would expect the income to rise gradually, in line with the performance of a balanced portfolio, which would help to keep up with the rising cost of living.
It would be important to consider what might happen if there were a few bad years on the share market and the pension went down, which makes the addition of some remaining super or savings that can be drawn down in lean times an important consideration.
One advantage of the Lifetime Pension is that not all of your money will be counted towards the government’s income and assets tests, which means it could be used to boost retirement income for those eligible for a part pension.
This might be particularly useful for those who are unable to get the age pension because they are over the assets test limit by a small margin – allowing them to qualify for at least a part age pension.
A fantastic start
Although there are a few cautions around QSuper’s Lifetime Pension, it is a fantastic start in developing a new retirement income product that will make a meaningful addition to what is currently a fairly meagre range of options for retirees.
QSuper also has some excellent information on its website about the product, including some calculators that can quickly illustrate real life examples using varying proportions of a super balance.
Hopefully, QSuper’s quiet revolution will be the start rather than the end of innovation in this space and we can look forward to a number of new Lifetime Pension products from various superannuation managers that will help to address longevity risk and increase the standard of living among retirees.