As another year draws closer to an end, it is prudent to turn attention towards the New Year ahead. In particular, 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 option 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:
||The world changes rapidly. Ready access to liquid funds are important.
||Investors need to understand how their funds are invested so they can make reasoned, considered decisions.
||Investors need their incomes to be market leading, with minimized risk and no capital losses.
||Investors need their capital at the end of the term, rather than drawing it down monthly to make up the returns.
La Trobe Financial as an alternative to Annuities:
What if you could achieve a strong income without locking funds away for 5, 10 or 15 years? By allocating funds strategically within the La Trobe Australian Credit Fund, investors have the potential to achieve a strong income, with great flexibility and capital stability. As market conditions change, your investment allocations can be altered to suit your appetite and the economic environment of the day.
By strategically allocating to our 12 Month Term Account (12TA) and Classic 48 hour Account (C48A), investors can replicate an annuity while retaining a great deal of control and flexibility. The following table demonstrates a potential return scenario for an investor:
|12 Month Term Account
|Classic 48 hour Account
The above structure might suit an investor seeking income, while keeping an amount available for a rainy day. By harnessing the return profile of our 12TA and achieving a return of 5.20%pa paid monthly the investor targets a strong income stream. By allocating $20,000 to our flexible C48A at 3.20%, the investor keeps a good amount free in case of an emergency or unforeseen expense.
Together and most importantly, in their allocation they still enjoy a strong blended return of 4.80%pa.
Benefits of this approach include:
- Potential to earn a strong income without the necessity of capital drawdowns (although note that returns are, of course, variable and are not guaranteed)
- Flexibility of redemption profile
- Flexibility of annual reviews and redemptions
- Preservation of capital / capital stability
- Underlying simplicity and transparency of the asset class
La Trobe Financial Product
La Trobe Financial has performed with stability, consistency and reliability for many years. The stability of our performance doesn’t lend itself to exciting, attention-grabbing press releases and updates but frankly that’s fine with us. As an alternative to Annuities, La Trobe Financial’s 12 Month Term Account represents the partner of choice for financial advisers across Australia.
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?
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