An Annuity Is | Mary Holm: Bring Back Annuity Schemes

This time next year people who joined KiwiSaver at 60 or older will be able to start taking out money.

I would like to run this past you. KiwiSaver has been a great success and has spawned an industry that now handles probably billions of our hard-earned cash.

So we retire, cash in our fund and walk away with maybe a couple of hundred thousand dollars. How do we then turn these dollars into regular income to supplement our NZ Super?

My suggestion is that the KiwiSaver companies (that have looked after our money) should then offer a safe regular income fund? There used to be annuities, but these seem to be unheard of today. Term deposits at the banks are about on par with inflation? Finance companies offer more but the risk is too great?

Mary, it couldn’t be that hard. The KiwiSaver funds have the organisations and the skills to offer a bit better than term deposits. How about it?

How about it, indeed, KiwiSaver providers? But I’m going to set the standards higher. While there are plenty of KiwiSaver schemes that offer bond funds, which should fulfil your needs, I want a revival of annuities or similar.

For those who don’t know what an annuity is, you give your provider a lump sum. In exchange, they give you regular income, often monthly, for the rest of your life.

It’s like insurance against outliving your savings. If you live for a long time, you get a really good deal. If you die soon, it’s a bad deal – but you’re not around to care about it.

Nobody can yet withdraw KiwiSaver money in retirement. But this time next year people who joined KiwiSaver at 60 or older will be able to start taking out money.

Some of the account balances will be too small to make much difference to anything, but others will be quite substantial. No doubt their owners would like a little time to think about what’s on offer, so let’s hear about it now.

When I wrote The Complete KiwiSaver , two years ago, the only provider selling annuities was Fidelity Life. And I think that’s still the case.

Quite a number of other providers said their KiwiSaver members could set up an arrangement under which a regular amount was transferred from their KiwiSaver account into their bank account. But that’s a bit different. Because nobody knows when they will die, most people will transfer too much or too little – ending up with either a shortfall in their 80s or 90s, or money still in KiwiSaver after they die.

As you say, annuities used to be fairly common. When my mother bought one, maybe 20 years ago, about 10 companies offered them. Since then, though, companies have gradually withdrawn from the market, partly for tax reasons.

The Capital Markets Development Taskforce and the Savings Working Group both urged the Government to look into ways to change the tax situation and otherwise encourage annuities.

So far, the Government has said it plans to issue inflation-linked bonds, which will mature in 2025, as part of its bond programme for the financial year 2011-12. This, the experts say, will be a useful place for providers to invest annuity money.

Here’s hoping the existence of those bonds – plus the impetus of retired KiwiSavers wanting annuities – prompts more companies to offer them. Having just one supplier is not good in any market.

If any providers would like a free plug for an annuity scheme or similar that they plan to offer in the next year or two, send me a brief description – up to 80 words – including a source of further information, and I’ll run it in this column.