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What to Do with KiwiSaver Proceeds in Retirement

14 Jun 2017

One of the challenges for KiwiSaver scheme members when they reach the age of sixty five is: should they continue to contribute to the fund, and or stay invested in the fund. Provided one is still in paid employment and can afford to save, then there is nothing lost by continuing to contribute to the fund. A generous employer may even continue to make employer contributions. What you will miss out on is the government’s ongoing contribution.

When KiwiSaver was first mooted, there seemed to be an expectation that there would be a market for annuities. So the KiwiSaver investor once reaching the age of sixty five, would then reinvest some or all of their KiwiSaver savings into an annuity. The annuity would then provide a regular income to supplement national superannuation.

Annuities are a means of converting a lump sum investment into a regular income stream.  You pay a lump sum to an insurance company and in return, the insurance company will make regular, usually monthly, payments to you.  These payments are a fixed amount.  They will continue for a set number of years, or until you die, depending on the type of annuity.  Annuities with payments guaranteed for life, therefore, are a better investment choice for those people who have an above average life expectancy than those with below average life expectancies. 

Despite a large number of KiwiSaver scheme members having reached the age of sixty-five, there does not seem to be either a demand or a supply of them. This may be because the returns that potential providers could offer, are very low in the current economic environment because of the very low by historical standards of interest rates, and the low yields of high quality bonds.

There are of course ways of providing a regular cashflow from lump sum investments. We have structured a number of our clients’ investment portfolios in order to provide a regular level of drawing. This is a very cost effective and efficient way of supplementing national super. We work through with the investor to determine how much regular “income” they require, and then provide projections for them. In some cases they decide to lower their income expectations, and in others it provides them with the ability to spend more than they had expected to be able to. Most importantly their investments are managed in a manner that they are extremely unlikely to run out of resources to fund their retirement.

Another option is to take out a lifetime income investment. This provides a set regular drawdown amount. The drawdown amount is dependent on the investor’s age. The return is based on a combination of investment return and a return of capital. It is structured so that if you live a long time, you still receive the regular drawdown, even though the capital may have become exhausted. If you only survive for a few years, your estate will receive the balance of the capital.

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.