Bringing do-it-yourself pensions out of hiding

By Mary Holm

Money Matters


Q: I am a British immigrant who has been in New Zealand for three years. I have followed the continued debate about superannuation with interest.

I may be missing the point, but given the verbal encouragement to save to create a pension fund, once such a fund has been accumulated there is a shortage of options as to how one receives a regular superannuation income.

It seems to me that all the options available preserve the capital.

Surely that is not the purpose of a pension fund.

In my view, it is desirable to use an accumulated pension fund in its entirety (income and principal) to provide one with an income for life.

In Britain it is common practice to accumulate a pension fund (incentivised by tax breaks) and use this fund to purchase an annuity which provides one with an income for life (and under certain circumstances a reduced pension for one's surviving partner).

As my pension funds are all based in sterling, I have the option of purchasing a sterling-based annuity to provide me with a superannuation income.

Is there any similar instrument available in New Zealand that will enable me to avoid some of the sterling/New Zealand foreign exchange rate risk?


A: Yes, annuities are available in New Zealand. And many people find them useful once they know they exist.

But I'm not surprised that you haven't heard about them.

I've got a sneaky suspicion it's because financial advisers don't get as much commission if they put you into an annuity as they do in many other investments.

For the benefit of others, annuities are do-it-yourself pensions. You pay an insurance company a lump sum. They pay you a regular income until you die, no matter how long you live.

Older people get more than younger ones, and men more than women of the same age, because they're not expected to live as long.

The payments are made up of the return the company makes on your money, plus - little by little - your capital.

There's nothing to leave your heirs. On the other hand, your offspring don't have to worry about your running out of money before you die.

You can get annuities for individuals or couples.

A popular add-on is a guarantee that payments will be made to you or your estate for, say, 10 years, even if you die sooner.

Another add-on is an increase in payments each year, of perhaps 2 or 3 per cent, to take inflation into account.

To give you an idea of what's going, Tower is offering the following annuities for $100,000, with a 10-year guarantee of payments.

The amounts are approximate total payments in the first year. The payments would rise by 2 per cent a year.

Note that tax has already been paid by the company, so you pay no further tax.

* Man aged 65: $6800; Woman aged 65, $5800.

* Man aged 80: $9600; Woman aged 80, $8900.

* Couple, both aged 70: $6100 if full payments continue after the first spouse dies; $6800 if half payments continue after the first spouse dies.

They compare pretty well with after-tax returns on other low-risk investments, especially for the 80-year-olds.

Some insurance brokers will get annuity quotes for you from several companies, and you might as well use that service. You won't get a cheaper price going directly to the company.

You might want to check, though, that the broker has got quotes from all the companies offering annuities. They are: AMP Life, Colonial, Fidelity Life, Royal & SunAlliance and Tower.

Another company, Coronet Life, which is affiliated with Challenger International Group, is expected to start offering annuities in New Zealand later this year, the company says.

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