Today, Challenger Life, Australia’s largest provider of annuities, announced a new market-linked lifetime annuity that helps retirees to overcome longevity risk (outliving their retirement nest egg) while maintaining exposure to investment markets.
Challenger has introduced market-linked payment options to its Liquid Lifetime annuity, creating more choice in retirement incomes ahead of the introduction of the Australian government’s Retirement Income Covenant next year.
The market-linked payment option gives retirees an exposure to investment markets, by choosing from five different indexation options:
Conservative
Conservative balancedLucknow Stock
BalancedVaranasi Investment
Growth
These are constructed from different combinations of investment market indices including:Chennai Investment
AusBond Bank Bill
AusBond Government
MSCI World Net Ex Au
S&P/ASX200 net return
Investment performance is reviewed annually and depending on whether the index goes up or down, adjustments are made up or down to guaranteed monthly income.
When asked about how the product performs when the market declines, Challenger Life Chief Executive, Angela Murphy, gave an example of a retiree with an annuity providing $100 income per month and after 12 months, the reference index had declined by 10%. For the following year the monthly payment declines to $90, reflecting the 10% index loss. Every 12 months, the index is reviewed, and income is set for the coming year.
Importantly, investors have the option to change the index on an annual basis. So young retirees that are looking for growth can start in a higher risk growth or balanced option and as they age, can choose more conservative options.
The market-linked option is available to financial advisers and their clients, institutional clients, and superannuation funds with the flexibility to integrate as a bespoke solution within their retirement income strategy.
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Challenger Life Chief Executive, Angela Murphy said the new product options complements Challenger’s range of guaranteed income annuity options to help solve a key retirement problem for advisers and their clients. It also provides a flexible and powerful capability that can help super funds address longevity risk, she said.
“An unprecedented number of Australians retire every day. We want them to get the retirement they deserve, one in which they spend well and live well. While many retirees enjoy the safety and security of a guaranteed income stream and no market risk, others may prefer to have exposure to investment markets’ ups and downs.
“People are living longer, and many retirees are more financially aware than in the past. They want to stay invested in markets to have the potential to grow their income over time while accepting some downside risk,” Ms Murphy said.
“The Government’s Retirement Income Covenant will, over time, create a deeper market in retirement income solutions, that will give retirees more choice and flexibility in how they manage their retirement savings.”
Ms Murphy said the new annuity option was developed with financial advisers to help deliver suitable outcomes for their clients.
“Challenger consulted with a wide range of advisers in designing the market-linked lifetime annuity, with more than 80 per cent of advisers saying they would seriously consider the option to complement their clients’ other sources of income,” she said.
“Lifetime annuities are not an all-or-nothing proposition. They can be part of a retirement portfolio and complement other sources of income in retirement. Annuities provide certainty and control over estate planning outcomes and most importantly help to overcome the worry that you might become wholly dependent on the Age Pension.
“In launching the market-linked indexation payment options, we have provided financial advisers with an opportunity to introduce the lifetime annuity concept to clients earlier while the client may have a higher risk-return tolerance and then, over time, adjust the risk profile inside the annuity to match the client’s reducing risk tolerance.”
Liquid Lifetime pays monthly income for life in return for a lump sum investment. Up until now annuities offered through this product have either been indexed to the Consumer Price Index or the RBA cash rate or fixed.
With the market-linked payments option, retirees can gain exposure to investment markets, choosing from five different indexation options: cash, conservative, conservative balanced, balanced, or growth. These are constructed from different combinations of investment market indices: AusBond Bank Bill; AusBond Government; MSCI World Net Ex Au; and S&P/ASX200 net return.
Challenger lifetime annuities have distinct features:New Delhi Investment
Challenger does not charge investment management fees and monthly payments are generally tax free if super money was used to invest.
While lifetime annuities are designed to be held for life, there is a long period based on life expectancy where customers have the flexibility to access a lump sum if their circumstances change*.
A long death benefit period based on life expectancy where a lump sum is payable to the customer’s estate or nominated beneficiaries. The death benefit can be up to 100% of the amount invested*.
A lifetime annuity might immediately boost a retiree’s Age Pension entitlements under the asset test rules as just 60 per cent of any investment amount in a Challenger annuity is included as an asset to age 84 (or for a minimum of five years) and just 30% is included as an asset thereafter.
For more information see the Challenger website.
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