Selecting the right product mix for
retirees
MICHAEL RICE
CEO
13 December 2013
2013
What are account-based pensions?
They have the following characteristics:
 Contributions cannot be made into these products
 Minimum pension withdrawals must be made each year
 The member takes on all risks including liquidity, inflation and longevity
 Investment strategies are extremely flexible
© 2013 Rice Warner
What are annuities?
 Annuities are a financial product issued by a life company
 They provide a guaranteed series of payments over a contractual period –
which could be for life
© 2013 Rice Warner
Types of annuities
Term certain


No residual value
100% residual (similar to term deposit)
Variable


Investor manages assets
Guarantee is an insurance option over floor income
Deferred


Pension commences at an advanced age
Price is paid much earlier – could be before or at retirement
Lifetime




Annuity payments made until death
Payments are often indexed (which costs more)
Can have minimum payment terms (say, 10 year guarantee)
Joint life can pay reversionary benefit until second death of a couple
© 2013 Rice Warner
Adequacy of Age Pension
Age
Pension
ASFA
Moderate
ASFA
Comfortable
Newstart
Singles
$21,505
$22,654
$41,197
$13,026
Couples
$32,417
$32,656
$56,406
$23,520
© 2013 Rice Warner
Age Pension Benefit
Impact of Assets Test
Category
Assets
Home
owner
Non
home
owner
No assets
$100,000
$200,000
$300,000
$400,000
Individual
$ 21,505
$ 21,505
$ 21,378
$ 17,478
$ 13,578
$
Couple
$ 32,417
$ 32,4178 $ 32,417
$ 31,598
$ 27,698
$ 23,798
$ 14,048
Individual
$ 21,505
$ 21,505
$ 21,505
$ 21,505
$ 19,135
$ 15,235
$
Couple
$ 32,417
$ 32,417
$ 32,417
$ 32,417
$ 32,417
$ 29,355
$ 19,605
© 2013 Rice Warner
$500,000
9,678
$750,000
$
-
5,485
Age Pension Benefit
Impact of Income Test
Category
Home
owner
Non home
owner
Assets
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$750,000
Income
$0
$6,000
$12,000
$18,000
$24,000
$30,000
$45,000
Individual
$ 21,504.6
$ 20,532.6
$ 17,532.6
$ 14,532.6
$ 11,532.6
$
Couple
$ 32,416.8
$ 32,416.8
$ 30,004.8
$ 27,004.8
$ 24,004.8
$ 21,004.8
$ 13,504.8
Individual
$ 21,504.6
$ 20,532.6
$ 17,532.6
$ 14,532.6
$ 11,532.6
$
$
Couple
$ 32,416.8
$ 32,416.8
$ 30,004.8
$ 27,004.8
$ 24,004.8
$ 21,004.8
© 2013 Rice Warner
8,532.6
8,532.6
$
-
1,032.6
$ 13,504.8
Needs of the newly retired
 Four buckets used for different purposes:




Lump sum for immediate expenditure
Liquidity Pool for pension payments over the next few years
Nest Egg for emergencies
Growth Pool for later years in retirement
 Retirees need to find products to place these funds. Clearly, a
single investment strategy cannot cater for all these
requirements
 Asset pools must be separated and matched to liabilities
© 2013 Rice Warner
Needs vary by size of account
Account balance
Lump sum
Liquidity
Nest egg
Growth
ALL
-
-
-
100,000 to 200,000
75,000
25,000
50,000
-
200,000 to 400,000
75,000
45,000
50,000
130,000
400,000 to 600,000
75,000
75,000
50,000
300,000
600,000 to 1m
100,000
120,000
80,000
500,000
1m to 2m
150,000
150,000
100,000
1,100,000
>2m
250,000
150,000
100,000
1,500,000
<100,000
© 2013 Rice Warner
Small Accounts
Account balance
Lump sum
Liquidity
Nest egg
Growth
ALL
-
-
-
100,000 to 200,000
75,000
25,000
50,000
-
200,000 to 400,000
75,000
45,000
50,000
130,000
400,000 to 600,000
75,000
75,000
50,000
300,000
600,000 to 1m
100,000
120,000
80,000
500,000
1m to 2m
150,000
150,000
100,000
1,100,000
>2m
250,000
150,000
100,000
1,500,000
<100,000
© 2013 Rice Warner
Low Balances
Account balance
Lump sum
Liquidity
Nest egg
Growth
ALL
-
-
-
100,000 to 200,000
75,000
25,000
50,000
-
200,000 to 400,000
75,000
45,000
50,000
130,000
400,000 to 600,000
75,000
75,000
50,000
300,000
600,000 to 1m
100,000
120,000
80,000
500,000
1m to 2m
150,000
150,000
100,000
1,100,000
>2m
250,000
150,000
100,000
1,500,000
<100,000
© 2013 Rice Warner
Modest Balances
Account balance
Lump sum
Liquidity
Nest egg
Growth
ALL
-
-
-
100,000 to 200,000
75,000
25,000
50,000
-
200,000 to 400,000
75,000
45,000
50,000
130,000
400,000 to 600,000
75,000
75,000
50,000
300,000
600,000 to 1m
100,000
120,000
80,000
500,000
1m to 2m
150,000
150,000
100,000
1,100,000
>2m
250,000
150,000
100,000
1,500,000
<100,000
© 2013 Rice Warner
Moderate Balances
Account balance
Lump sum
Liquidity
Nest egg
Growth
ALL
-
-
-
100,000 to 200,000
75,000
25,000
50,000
-
200,000 to 400,000
75,000
45,000
50,000
130,000
400,000 to 600,000
75,000
75,000
50,000
300,000
600,000 to 1m
100,000
120,000
80,000
500,000
1m to 2m
150,000
150,000
100,000
1,100,000
>2m
250,000
150,000
100,000
1,500,000
<100,000
© 2013 Rice Warner
Adequate Benefits
Account balance
Lump sum
Liquidity
Nest egg
Growth
ALL
-
-
-
100,000 to 200,000
75,000
25,000
50,000
-
200,000 to 400,000
75,000
45,000
50,000
130,000
400,000 to 600,000
75,000
75,000
50,000
300,000
600,000 to 1m
100,000
120,000
80,000
500,000
1m to 2m
150,000
150,000
100,000
1,100,000
>2m
250,000
150,000
100,000
1,500,000
<100,000
© 2013 Rice Warner
Comfortable Retirees
Account balance
Lump sum
Liquidity
Nest egg
Growth
ALL
-
-
-
100,000 to 200,000
75,000
25,000
50,000
-
200,000 to 400,000
75,000
45,000
50,000
130,000
400,000 to 600,000
75,000
75,000
50,000
300,000
600,000 to 1m
100,000
120,000
80,000
500,000
1m to 2m
150,000
150,000
100,000
1,100,000
>2m
250,000
150,00
100,000
1,500,000
<100,000
© 2013 Rice Warner
Wealthy Retirees
Account balance
Lump sum
Liquidity
Nest egg
Growth
ALL
-
-
-
100,000 to 200,000
75,000
25,000
50,000
-
200,000 to 400,000
75,000
45,000
50,000
130,000
400,000 to 600,000
75,000
75,000
50,000
300,000
600,000 to 1m
100,000
120,000
80,000
500,000
1m to 2m
150,000
150,000
100,000
1,100,000
>2m
250,000
150,000
100,000
1,500,000
<100,000
© 2013 Rice Warner
Investing the Growth Component
Asset Class
Expected
GROSS 10 year
return
Value add
from franking
credits
Total Return
Australian shares
8.5%
1.7%
10.2%
Balanced Fund
6.5%
0.5
7.0%
Life Annuity
4.5%
-
4.5%
Cash
3.5%
-
3.5%
© 2013 Rice Warner
Contestable market for annuities
Account balance
Lump sum
Liquidity
Nest egg
Growth
ALL
-
-
-
100,000 to 200,000
75,000
25,000
50,000
-
200,000 to 400,000
75,000
45,000
50,000
130,000
400,000 to 600,000
75,000
75,000
50,000
300,000
600,000 to 1m
100,000
120,000
80,000
500,000
1m to 2m
150,000
150,000
100,000
1,100,000
>2m
250,000
150,000
100,000
1,500,000
<100,000
© 2013 Rice Warner
Annuities to cover fixed expenses
Account balance
Lump sum
Liquidity
Nest egg
Growth
ALL
-
-
-
100,000 to 200,000
75,000
25,000
50,000
-
200,000 to 400,000
75,000
45,000
50,000
130,000
400,000 to 600,000
75,000
75,000
50,000
300,000
600,000 to 1m
100,000
120,000
80,000
500,000
1m to 2m
150,000
150,000
100,000
1,100,000
>2m
250,000
150,000
100,000
1,500,000
<100,000
© 2013 Rice Warner
Account based pension + Annuity
© 2013 Rice Warner
Account based pension
© 2013 Rice Warner
DISCLAIMER
The information contained in this presentation is provided by Rice Warner Pty Limited, ABN 35 003 186 883, AFSL 239191
(Rice Warner). It is intended as general information and is not personal advice as it does not take into account the
particular circumstances of any reader. While due care and attention has been exercised in the preparation of this
presentation, no representation or warranty, either express or implied, is given as to the accuracy, completeness or
reliability of this information. The information presented is not intended to be a complete statement or summary of the
matters referred to in the presentation.
13 December 2013
© 2013 Rice Warner. All rights reserved. Proprietary and Confidential. For Rice Warner and Rice Warner client use only.
Document No: 227081_1
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