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Federal Government Delivers Major Blow to Pensioners

From 1 January 2017 many pensioners will be earning significantly less each fortnight as a new assets test takes effect. The big losers under the new arrangement are part-pensioners. According to research, some 91,000 part pensioners will lose their Age Pension in full, and a further 235,000 part pensioners will have their payments reduced. Some part-pensioners face reductions of over $400 per fortnight to their current situation. Anecdotally, and perhaps most alarmingly, many aren’t even aware the changes are coming!


All this means there will be lots of investors seeking to improve income streams in the very near future, however the issues of sequencing risk and longevity risk are more relevant to these investors than ever. The challenge, in the current low rate environment we operate in, is to generate income without exposing the investor to undue risk: Investors cannot afford capital losses nearing or during retirement but we are also living longer, so we don’t want the money to run out either!


There are options


It is widely known that Australian retirees and investors are holding a lot of cash either in cash accounts or term deposits. This position has been left largely unchallenged as investors have let their equities exposure do the heavy lifting in their portfolios, notwithstanding the hunt for income which has been covered previously in this column. Assuming investors’ positions are set in their equities portfolios, investors are going to investigate strategic ways of allocating their cash to boost incomes.


One of several options that may be worth considering to meeting income requirements is Annuities.


Annuities represent the exchange of a lump sum for future cash flows. By investing with an annuity provider, the provider guarantees to pay you an amount each month for a set term, be it, five, ten, fifteen years or a lifetime. The set return is usually comprised of actual returns generated plus a principal component being paid back each month.


ASIC’s ‘MoneySmart’ website lists the pros and cons of Annuities as follows:


  • Guaranteed income source

  • Tax benefits (various)

  • Peace of mind


It lists the drawbacks as:


  • You cannot take out your money as a lump sum

  • You cannot choose how your money is invested by the fund manager

  • You may not be able to transfer to an account-based pension

  • Over the long term, an annuity might pay less than a market-linked investment


An Annuity hits the sweet spot in terms of income, but its drawbacks go against the grain of what we understand investors want, being:


Flexibility:

The world changes rapidly. Ready access to liquid funds are important.


Transparency:

Investors need to understand how their funds are invested so they can make reasoned, considered decisions.


Income:

Investors need their incomes to be market leading, with minimized risk and no capital losses.


Longevity:

Investors need their capital at the end of the term, rather than drawing it down monthly to make up the returns.


Conclusion: There is a wave of part-pensioners about to need assistance in replacing an income stream they don’t yet know they’re losing. La Trobe Financial offers products and opportunities to provide flexible, capital stable, annuity-like income solutions to investors to meet this need.


With apologies to John Lennon, So this is Christmas, and what have you done… about it?


In preparing in this article we have not taken into account any particular persons objectives, financial situation or needs. Investors should, before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. We recommend investors obtain financial advice specific to their situation before making any financial investment or insurance decision.

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