Question 1

• My wife and I are 60 and are lucky to have $1.7 million in super. Should we just use a retirement account or move to a lifetime pension? What are the pros and cons please? 

When you say a ‘retirement account’, I presume you mean an account-based pension.

This is by far the most popular retirement income product used. This is due to several factors, such as:

• Most super funds only offer this type of product
• It’s very flexible and you can change the income drawdown amount each year (subject to a minimum) and take lump sums whenever you want
• You have a choice to invest your money across a large range of investment options, just like you do within the accumulation stage.

However, the biggest drawback to this type of product is that if you draw down too quickly and/or if you suffer poor investment returns, then you may run out of money.

Several studies have shown that this is retirees’ No.1 financial worry – running out of money.

Understandably, because we don’t know when we are going to die, many people only draw down small amounts from their allocated pension to alleviate this worry.

This can lead to a sub-optimal result where more people are dying with most of their super still intact than those who run out of super. (Although one person did tell me they knew when they were going to die because their birth certificate had an expiry date on it).

This brings us to lifetime annuities and pensions.

We are finally seeing more products and choice in this space. The main advantage of these products are:

• They guarantee an income for life, regardless of how long you live
• There are now more options available within these products, such as partial death benefits should you die early and/or the pension reverting to your partner
• Psychologically it provides peace of mind. And if taken with an account-based pension you may be more likely to feel free to spend down the account-based pension knowing you will always have some income for life
• They can provide age pension benefits in that they are concessionally treated under Centrelink’s income and asset test. Although given your account balance this may not be applicable for yourselves.

The big downside is they are inflexible, and withdrawals may be limited or not allowed at all. Payments are also fixed with little variability.

Lifetime annuities are also subject to underlying interest rates at time of purchase (may be an advantage if rates are high). If you are in poor health, then these products are probably not for you.

Lifetime annuities and pensions have their place and should be considered, especially for part age pensioners who want a boost to their pension, or those worried about out living their money.

However, I would never recommend putting all your money into one as you need to retain some flexibility and cover unexpected expenses that life will throw at you.

Therefore, a combination of an account-based pension and lifetime pension should also be considered.

Your question is a timely one.

The government has recently released a discussion paper, Superannuation in retirement, which seeks to make the retirement income system more easily understood and make lifetime pensions more accessible.

 Question 2

• What are your thoughts on the use of agents that purport to return trailing commissions from your investments albeit at a discount or full amount after fees?

There are some companies that you can nominate as your ‘financial adviser’.

If you do nominate them, they pay you commissions that the investment/insurance product would normally pay a financial adviser, less something they keep from themselves, normally a percentage of the commissions.

For investment products you could look to simply just turn off commissions. That would alleviate the need for these companies in most instances. And most new investment products do not have commissions built in.

However, for life insurance companies it’s a different story. While many financial advisers have moved to a ‘fee for service’ model, most advisers who specialise in life insurance continue to receive upfront and ongoing commissions from the insurance product providers.

You would think you could turn these commissions off, but unfortunately that is not the case. They were built into the product pricing and in my experience cannot be stopped.

You could cancel the insurance policy and obtain a new one. However, and this is very important, you need to first ensure you can be accepted for a new policy, with no health exclusions or premium loadings. If you have some health concerns, then this may not always be the case.

Similarly, there may be specific policy conditions you currently have that you do not want to lose.

In these instances, you might be stuck with your existing policy, and using one of these companies to at least pay you back some of the commissions makes sense.

Shop around to ensure you choose a provider that doesn’t keep too much of the commissions for themselves.

Also be aware, that when these companies pay you this money it may have to be included as taxable income on your tax return.

Craig Sankey is a licensed financial adviser and head of Technical Services & Advice Enablement at Industry Fund Services

Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.

Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.

The New Daily is owned by Industry Super Holdings