Annuities for Retirement Income

Retirement is something to look forward to – a new way of being, and lots of new experiences ahead. However, there is one big concern, and that is making sure there is enough money to provide a comfortable lifestyle until the end of life. Accumulating money in KiwiSaver or superannuation scheme is straightforward; it’s just a matter of setting up a regular payment into the scheme where it is managed. Once the funds become available on reaching retirement, the big question is what to do with them.

In simple terms, most retirees want an ongoing income that is higher than NZ Superannuation and access to occasional lump sums for big one-off expenses such as buying a new car or travelling overseas. One solution for this is to have an investment portfolio which comprises an annuity to provide ongoing income and a lump sum invested in liquid assets which can be sold to release additional funds. An annuity is a contractual financial product which converts a lump sum into a series of regular payments for life. The payments made are a combination of investment return and repayment of investment capital. Old style annuities have no residual value on death and do not allow withdrawal of lump sums over and above the regular payments however there are new products which offer residual value and withdrawals.

Unfortunately, annuities have limited availability in New Zealand. Members of the now closed Government Superannuation Scheme and certain company superannuation schemes may have the option of taking some or all of their funds as an annuity. Late last year a new annuity product called Lifetime Income Fund was launched with the aim of making annuities a more widely available option for retired investors. The key advantage of annuities is certainty of income – something which most retirees desire.