CPD: Guaranteed lifetime income myths…busted!

Guaranteed lifetime income products can add value to retiree clients.

As Australians live longer lives, the need for guaranteed lifetime income is greater than ever. In this article from Allianz Retire+, some of the myths that prevail about this product class are discussed – and busted.

Navigating the changing landscape of retirement income products can sometimes feel like traversing a minefield of myths and misconceptions. The need for innovation in this sector has been placed firmly in the spotlight by the Retirement Income Covenant, which reinforces the need for tools, products and strategies to support retired Australians in a future where people live longer, and every dollar has to be stretched further.

While it’s not news that life expectancy has increased around the globe, in Australia, we gained a decade of life expectancy since the Superannuation Guarantee was introduced in 1992. In the early 90s, Australia seemed to be on the path to a retirement crisis. A falling birth rate and ageing population pointed to a future where an increasing number of older Australians would likely become reliant on the government purse to fund their retirement years.

Today, many Australians have more retirement savings per capita than any other country. While Australia has the world’s 54th largest population, it has the fourth largest retirement system^[1]. Our retirement system is sizable and projected to grow from 116% of Australia’s GDP during 2022-23 to approximately 218% of GDP by 2062-63.

Until recently, investment strategies and products that have had an emphasis on the accumulation of assets for retirement have dominated the landscape. These products generally have not provided the financial certainty your clients should expect for their retirement years. Once retirement income replaces the regular salary from a job, Australians should not have to worry about inflation, market volatility or living a long life. They certainly should not have to fear running out of money or having to solely rely on the Age Pension.

‘Next generation’ retirement income products

Despite the increasing size of super retirement balances, research consistently shows that money worries are a leading cause of anxiety for older Australians^[2]. The biggest fear expressed by retirees is running out of money; either because they outlive their savings or because it’s eroded by external factors such as market volatility or inflation. When faced with traditional retirement income products, there are generally tough trade-offs to be made between income certainty and flexibility.

Clearing up historical misperceptions around complexity, cost, flexibility and lack of growth potential not only underscores the positive evolution of retirement income products, but also accentuates the valuable contribution these products can make to a comprehensive retirement plan. It also emphasises the need for information and education to understand and use these products.

Next generation retirement income products can help retirees to look forward with confidence. Being an early adopter of guaranteed lifetime income products requires commitment, ongoing education and a willingness to embrace change. It’s important to be well-equipped to overcome misconceptions, manage reluctance and promote better understanding around the topic.

Let’s address those misconceptions.

Myth: Guaranteed lifetime income products are overly complex

Reality: Advancements in user experience are driving simplification

Thanks to the rapid advancements in technology and a growing emphasis on user centric design, today’s retirement income products are undergoing a remarkable transformation towards simplicity and accessibility. Gone are the days when navigating a maze of complex financial jargon was the norm. Instead, the next generation of retirement income products embrace a user friendly approach that makes them not only easier to use but also simpler to explain to clients.

While traditional annuities are riddled with complexity, a strong focus on simplification ensures that next generation products have a user friendly approach to customer experience, with intuitive design and easily understood features. Unlike their predecessors, which sometimes left advisers and their clients scratching their heads in confusion, these modern solutions prioritise clarity and transparency.

One of the most notable improvements lies in the way key features are presented and explained. This includes simple explanations of key features, explanatory videos, as well as a range of tools and calculators to estimate and demonstrate future income payments. These tools not only empower financial advisers to demonstrate the benefits of these products effectively but also enable individuals to make informed decisions about their retirement planning journey.

The notion that guaranteed lifetime income products are overly complex is a relic of the past. With a renewed focus on simplicity and user experience, today’s next generation retirement income products are paving the way for a more intuitive and accessible retirement planning process.

Myth: Guaranteed lifetime income products have high costs

Reality: Product innovation, cost efficient structures and economies of scale provide more attractive pricing

The costs associated with next generation guaranteed lifetime income products have declined over recent years thanks to ongoing product innovation and more cost efficient structures. By leveraging cutting-edge technology and sophisticated financial engineering techniques, providers have been able to develop more efficient and streamlined products. These advancements not only enhance the overall performance and reliability of these products but also contribute to lower operational costs.

The shift towards digitalisation over recent years has played an important role in driving down costs. By harnessing the power of technology in the development and deployment of these products, providers can achieve economies of scale that were previously unattainable.

From automated processes to digital distribution channels, every aspect of the product lifecycle has been optimised to minimise overhead expenses. As the retirement landscape continues to evolve, individuals can look forward to a retirement where securing a reliable income stream in retirement is both achievable and cost effective.

Myth: Guaranteed lifetime income products lack flexibility and accessibility

Reality: Traditional annuities may lack flexibility and accessibility, next generation products do not

Complexity isn’t the only reason for the low take up of annuities in Australia. The rigid structure, the lack of flexibility and inability to access capital are other factors that prevented a more widespread adoption of these products.

However, the emergence of next generation guaranteed lifetime income products has effectively addressed these shortcomings, offering your clients a compelling blend of certainty and flexibility. Unlike their traditional counterparts, these innovative solutions empower individuals with the assurance of a guaranteed income for life while simultaneously providing the flexibility to access their capital when needed.

Unlike traditional annuities, investors are no longer forced to make an all or nothing decision to give up access to capital in return for access to a guaranteed income for life. The cornerstone of next generation products is the balance they strike between providing a reliable income stream for retirement and preserving the flexibility to meet unforeseen financial needs. Instead, your clients can enjoy the peace of mind that comes with a steady stream of income while retaining the ability to tap into their capital as circumstances dictate.

The flexibility offered by these products often extends beyond simple withdrawals. For example, many next generation solutions have the option to tailor an individual’s income streams to match needs and preferences, whether it’s adjusting the payment frequency or incorporating features such as inflation protection.

By combining the certainty of a guaranteed income with the flexibility to access capital, next generation retirement income products offer a compelling solution for retirees seeking financial security without sacrificing control over their assets.

Myth: Guaranteed lifetime income products have limited growth potential

Reality: Retirement income planning should (and can) include growth potential and protection

Retirement planning isn’t just about ensuring a stable income stream; it’s also about striking a delicate balance between growth of assets and protection against downside risks. As your clients prepare for retirement, they face the dual challenge of accumulating enough assets to sustain their lifestyle throughout retirement while safeguarding against the uncertainties that can erode their savings over time.

Traditionally, investors have turned to growth assets such as equities and managed funds to fuel the growth of their retirement nest egg. While these investments offer the potential for higher returns, they also come with a significant degree of market volatility. This volatility can pose a threat to retirement savings, particularly during the drawdown phase, potentially jeopardising investors’ ability to sustain their desired standard of living throughout retirement.

Recognising the need for a more balanced approach, most next generation retirement income products combine the growth potential of traditional investments with a downside protection mechanism that shields investors from excessive risk exposure. By incorporating elements of both growth and protection, these products can provide clients with the best of both worlds: the opportunity to benefit from capital appreciation while safeguarding against market downturns.

Next generation products therefore can be a valuable addition to a well-diversified retirement portfolio, providing exposure to growth assets alongside a downside protection mechanism that limits risk exposure. This offers your clients the potential to benefit from the capital growth necessary to mitigate the effects of inflation with limited exposure to market drawdowns, and provides the certainty of a reliable, steady income stream in retirement.

Retirement income planning should not be viewed as an either/or proposition between growth potential and asset protection. Instead, it should be about finding innovative solutions that offer the best of both worlds, that allow investors to enjoy the benefits of capital growth while safeguarding against the risks that can threaten their financial security in retirement.

Myth: Clients aren’t asking for guaranteed lifetime income products

Reality: When presented to clients, or when the question is reframed to specify guaranteed lifetime income, clients do want the features offered

Many of your clients will know what they want (or need) without necessarily being able to clearly articulate the features and benefits they seek in their retirement products. They also know what concerns them.

A 2023 retirement readiness survey found three factors that most negatively affected Australians’ confidence that they could retire when planned: inflation and the cost of living crisis, mortgage debt/rent and housing costs and medical expenses^[3].

The need for flexibility in early years that is balanced by security in later years is the model most favoured by respondents to the survey; this loosely reflects the principles of the Retirement Income Covenant, which are to:

• maximise expected retirement income
• manage expected risks to the sustainability and stability of retirement income
• have flexible access to expected funds during retirement.

While the research demonstrated clear signals of change, particularly in relation to how respondents would choose to access their retirement savings, there remains a disconnect between the wish for guaranteed lifetime income products and investors articulating that desire.

There are many factors that can influence how individuals approach the decumulation phase of retirement. Behavioural biases can often affect investor decision making. Inertia can result in investors staying with the status quo, even when it’s not optimal for the future, while present bias may result in a tendency to prioritise immediate needs over longer term planning.

While biases and/or a lack of understanding can hinder demand for guaranteed lifetime income products, evidence shows that familiarity with the benefits of guaranteed lifetime income increases demand.

The results from above-cited survey included encouraging signs that annuities may have “turned the corner in Australia…[which] does bode well for trustees looking to include longevity products in holistic retirement solutions^[4].”

The key takeout is that the better educated your client, the more open they are to solutions that can best meet their needs, today and into the future.

As your clients navigate the complexities of retirement planning, it’s essential to challenge outdated perceptions and embrace the possibilities offered by next generation guaranteed lifetime income products. By doing so, your clients can embark on their retirement journey with confidence, knowing that they have a reliable and sustainable source of income to support their desired lifestyle throughout retirement.

Next generation guaranteed lifetime income products represent a paradigm shift in retirement planning, offering simplicity, affordability, flexibility and growth potential in one comprehensive package. Through advancements in technology, innovative product design, and a renewed focus on user experience, these products have become more accessible and user friendly than ever before.

Next generation retirement income products address the fundamental challenges of retirement planning by providing a reliable income stream that’s guaranteed for life, while simultaneously offering the potential for capital growth and protection against downside risks. By striking a delicate balance between growth and protection, your clients can enjoy the best of both worlds: the opportunity to accumulate wealth for retirement while safeguarding against market volatility and longevity risk. As awareness of these innovative options grows, more Australians are likely to embrace the benefits of guaranteed lifetime income products as a cornerstone of their retirement planning strategy.

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Notes:
[1] OECD Pensions at a Glance, 2023
[2] R Dinham, ‘A close look at retiree fears and expectations’, Firstlinks, 3 February 2021
[3] State Street Global Advisers 2023 Australian Retirement Survey findings
[4] Ibid