Why Do Retirees Need Deferred Lifetime Annuities?

Deferred lifetime annuities can fill a significant product gap within the retirement market, and only life insurers offer them.

Annuities are a unique product type that promise to provide retirees with an income stream through the later stages of their life.

This is especially important for Australians – now amongst the longest-living people in the world – who face the real risk of outliving their own retirement funding.

A specific type of annuity, called a deferred lifetime annuity, is ideally placed to help people manage the risk of outliving their retirement funding (often referred to as longevity risk).

What is a deferred lifetime annuity? Simply, they are a product that provides an income stream once the person reaches a certain age, say 80 or 85.

But due to regulatory hurdles, deferred lifetime annuities remain too expensive for consumers to be attractive and thus there is virtually no effective market for them in Australia.

Life insurers want to help manage retirement risk

A big regulatory hurdle for life insurers to bring deferred lifetime annuities to market is that they need to provide what is called a ‘minimum surrender value’ (MSV), a form of cash back in certain circumstances.

And retirees would be more attracted to deferred lifetime annuities if they shared the concessional tax treatment enjoyed by other super products with supporting income streams.

The former Labor government had given the green light for deferred lifetime annuities to have the same concessional tax treatment as other super products with supporting income streams as of 1 July 2014.

However about Retirement Pension Plan, the new coalition government has put this on hold, pending a fuller review of tax reforms for the financial services sector.

TAL also argues that overly prescriptive regulations governing how income payments are made need to be lifted to encourage better product development.

Remove regulatory barriers

Instead of only providing for fixed percentages or increases to CPI/inflation, TAL wants regulations to allow links to the share market index or other measures that would expose income streams to potentially higher rates of growth where there’s greater appetite for risk.

If these barriers were removed, the overall cost of deferred lifetime annuities would be considerably less.

TAL is calling for regulatory changes so deferred lifetime annuities can become more attractive and help people manage their retirement risk.

[Source: https://www.tal.com.au/voice-for-life/retirement/why-do-retirees-need-deferred-lifetime-annuities]