Know this first:

1. The concept of annuities and guaranteed income are both relatively new to New Zealand, and don’t worry if you find them complicated – they are!
2. As more providers either introduce, or look to offer such products, we anticipate more media attention on them and higher awareness of how they work in the public domain.
3. If you want the certainty of a fixed income every year for the rest of your life, an annuity can provide this. However, there are costs involved, including insurance and management fees, insurance premiums and the possibility of negative returns on your assets. In saying this, the product offers a fixed guaranteed income for life, irrespective of the investment performance.
4. Be aware, the insurance and management fees are deducted from your initial investment, meaning you and/or your estate are probably going to be left with much less than you invested, or in some cases, nothing, depending on what age you die. Lifetime is about income in retirement that’s insured for life, not accumulating wealth for the future. 
5. It is often easier, and significantly cheaper, to manage your money yourself depending on your financial background. We include a comprehensive comparison with putting money in Lifetime vs in a bank. 

 
Be Aware: New Zealand Retirement Schemes have a chequered history - guaranteed annual payments attract attention

• The retirement industry in New Zealand has suffered its fair share of problems, from failed finance companies, property development funds, bankrupt NZX-listed companies, Ponzi schemes and dodgy ‘too good to be true’ investment scams.
• Because the only thing that is certain in the future is death, the offer of having a guaranteed income stream for the rest of your life can appear to be very attractive.
• However, there are many things to know before making any decision to take out a variable annuity.

Warning: Do NOT invest in Lifetime (or any other annuity) if you do not fully understand how it works, the costs and the risks. It's essential that you know what you are getting into before you give over any amount of money as there are long-term implications of this investment.

1. By definition, a variable annuity is a "fixed sum of money paid to an individual or couple fortnightly or monthly typically for the rest of their life". In its simplest form, it is an insurance policy.
2. You pay a sum of money to an insurance company who in return guarantees you will always be paid a fixed amount of money until you die.
3. The sum of money you pay to the insurance company will be invested on your behalf in a fund.
4. The guaranteed payment you receive will be made up from your original capital investment and the returns the fund makes.
5. If the fund doesn't earn enough money to cover the payments and fees over time, and all of your money has been paid out to you, the variable annuity guarantees you will continue to be paid. This is how the insurance policy components works. You are protected no matter what happens to your money and for the rest of your life. 

How does this relate to Lifetime?

• The Lifetime product is a variable annuity, and allows you to buy an insurance policy. You pay Lifetime a sum of money, it invests it on your behalf, and you receive the same amount of money every month or fortnight until you or your spouse dies (if you choose the spouse benefit).
• There is provision to withdraw lump sums from your fund. On your death, your estate receives any balance in the fund. 

Important - Lifetime's product is 'variable' and different from the historical concept of an annuity. In a good way.

1. Every investor has access to their capital, (less income payments and net investment returns) at any time. This is an improvement from older products which were 'purchased' meaning the capital was lost. In summary, if you want your money later on, you can withdraw it.
2. Older annuities generally offered returns that were linked to similar duration fixed-interest investments which meant low returns. The Lifetime product invests in a balanced fund with an expected gross return over 20 years of 6.5% p.a.
3. Older life annuities were held as a balance sheet asset of the Insurer and the fund returns were taxed at the same rate as the insurer. But Lifetimes' funds are a PIE and not held on its balance sheet; tax is deducted at the individual’s tax rate, rather than Lifetime's.

Know this:

• The guaranteed income you receive every year is not a return on your investment - your money decreases year after year as fees are charged, the fund makes its returns and your guaranteed income is paid out.
• If you are told by anyone selling variable annuities that your guaranteed income is a return on your investment, this is not true (and also fraudulently misrepresents the product). 

How does Lifetime's policy work in practice?
​The ins and outs of the policy are best explained using an example: 

• Max and Claire are both 64 and want to retire at 65.
• They have $100,000 set aside and want to buy Lifetime's policy to give them a guaranteed income for life. The $100,000 becomes what is known as their 'Protected Income Base'.
• Lifetime's 'Withdrawal Benefit Payment Rate' for anyone retiring at 65 years of age is 5.00%.
• What this means is that the policyholder(s) will receive 5.00% per year, every year, on the money they set aside for the variable annuity.
• For Max and Claire, this means they are guaranteed to receive $5,000 (5.00% of $100,000) each year for the rest of their lives.
• To kick things off, they transfer $100,000 to Lifetime and their money is invested in a fund which aims to make a return above 6.50% per year.
• As the future performance of global markets can never be predicted, the fund's return may be less than 6.50% per year Lifetime states it expects. If there is any shortfall in returns, Max and Claire still receive their $5,000, but the shortfall will come from the original $100,000 they paid to Lifetime originally.
• If Max and Claire live long enough, the funds they set aside may have all been eaten up in guaranteed income payments and Lifetime's ongoing fees. If this is the case, the policy guarantees them that they will continue to receive their $5,000 every year even if there is nothing left. This is the risk that Lifetime takes.
• Conversely, Max and/or Claire may pass away - at this point, whatever is left from their original payment to Lifetime will become the property of the estate.
• Max and Claire have the option, for an extra fee, to have the income continued to be paid to the surviving partner on death of either Max or Claire.

Important - the most important thing is that your annual income is GUARANTEED
No matter what happens to your investment, even if it goes to $0, your annual income is protected. You cannot outlive the benefits – even if you receive more each year than your fund is worth, you will continue to receive the money year after year until you die. We analyse the payments below.  

Understanding Lifetime's ongoing fees is essential in your decision marking, and we put the different fees in context below with common examples:

• Insurance fees: You will pay 1.35% per year of your original payment to Lifetime for insuring you to you receive your guaranteed income. If your initial payment was $100,000, you would pay $27,000 in insurance fees in the first twenty years. 
• Management fees: You will also be charged a fee for having your fund managed, and you pay 1% every year on the remaining balance of your fund. Over 20 years, that adds up to $15,000 (based on the assumption your fund grows 6.50% per year, before deductions for tax, the 5% payments to you and the insurance fees). Add this to your insurance fees, and it’s $42,000 over 20 years, or $2,000 a year in fees you will pay on the original $100,000 investment.
• Be aware, the insurance and management fees are deducted from your initial investment, meaning you and/or your estate are probably going to be left with much less than you invested, or in some cases, nothing if you live beyond 90 years of age.

Joining and Withdrawing fund fees:

• Joining fee - You have to pay to join the fund (0.125% of the value). So if you invest $100,000, $125 is deducted, so your available money is $99,875.
• Withdrawal fee - You can withdraw multiple lump sums, and you’ll pay a fee on the amount you take out (0.125% of the value). For example, if you take out $10,000, you’ll be charged a $12.50 fee. ​​

To understand how Lifetime works, we've presented a simple table below that charts the cash movements from age 65 to age 100. You can download both the tables as a PDF (Table 1 and Table 2).  

In Table 1, we have used an example of an original Fund Balance of $100,000.

1. Every year, we assume the Fund Performance will be 6.50% (which is consistent with what Lifetime says they expect).
2. The return is added to the fund balance, then Tax is deducted. We have used a Prescribed Investor Rate of 17.50% but your tax rate may be higher if you earn more. 
3. The Management Fee (1% on your closing fund balance) and Insurance Fee (1.35% on your original payment to Lifetime) are also deducted. 
4. Finally, a Cash payout is made (i.e. the guaranteed income you receive fortnightly or monthly). 
5. The Net Movement is how much your fund has increased or decreased in the year. Unless the average Fund Performance is above 9.00%, it is likely the Fund Balance will decrease year after year. 
6. In this example, we see that at age 92, the Fund Balance is $1,257 and the total returns have been $140,000. If the policyholder lives beyond 92, the Fund Balance becomes negative, but due to the insurance policy, they will continue to receive their $5,000 guaranteed income every year until they pass away.
7. As a point of interest, the total Management and Insurance fees paid by age 92 total close to $55,000.

Conclusion
Based on our calculation, we believe that Lifetime only has some value if the policyholder lives significantly beyond 92 years of age. We have compared the alternative option of investing the original $100,000 in the bank (see Table 2 below). 

In Table 2, we have also used an example of an original Fund Balance of $100,000.

1. Every year, we assume the Bank Interest rates will be 3.50% (which is consistent with 2018/19 term investment interest rates).
2. The return is subject to Tax which is deducted - we have used a Prescribed Investor Rate of 17.50% but your tax rate may be higher if you earn more.
3. The Net Proceeds is the Bank Interest less Tax. In this case the amount is $2,888 per year, this is paid in cash to the investor. 
4. The term deposit's assumed interest rate (3.50%) is not enough to earn $5,000 per year, so we have calculated that the remaining portion of the $5,000 will be funded by your original investment. As time goes on, the interest you earn (in dollar terms) drops as more and more of your original investment is paid out every year as part of the $5,000 you receive (Lifetime works the same way). 
5. By the age of 95, your investment is worth $1,309, and you have received $150,000 of payments over 30 years.
6. Lifetime, by comparison in Table 1, shows your fund running out at 92 years of age based on a 6.50% annual return. After 92, you will receive $5,000 for the rest of your life as per the insurance policy. With a bank deposit, you will receive $0 after 95 years of age. 

The rate of inflation is really important - if New Zealand sees a return to the 5%+ levels of annual inflation of the 1980s and 1990s, the benefits of the offering are significantly reduced. Specifically:

• The standard Lifetime product is NOT inflation adjusted. This means what you get paid in today’s money will be worth a lot less in the future. To protect against this, Lifetime offer indexed options at lower guaranteed rates to help manage the impact inflation has on the value of income payments. 
• For example, if you retired at 60 in 1970 with a $25,000 investment (which back then was enough to buy a house in Auckland) and a 5% guaranteed income every year, you would receive $1,250 per year.
• The problem is that inflation can seriously affect the value of this income. While $1,250 per year in 1970 was a lot, it was a lot less valuable by 1990, and it is not that much in 2019-20.
• There is a serious risk that if inflation was to take off again in New Zealand, your 4.50% to 7.50% guaranteed income wouldn’t keep up with the increasing cost of everyday items. As a point of reference, inflation is currently running at around 2%. 

1. Simplicity
Simplicity offers the KiwiSaver Guaranteed Income Fund, which offers the same benefits and structure as Lifetime, but for a lower fee. The Simplicity Guarantee is provided and backed by Lifetime. With Simplicity, the annual fees are a $30 membership fee, 1.30% for the insurance fee, and 0.31% for the management fee. In comparison, Lifetime charges 1.35% for the insurance fee and 1.00% for their management fee. On a $100,000 investment, the saving with Simplicity could be as much as $710 per year. Lifetime also provides the guarantee offered in the guarantee income options offered in the Britannia Superannuation Scheme.

Who can join?
If you are under 65 and not in KiwiSaver you can sign up for Simplicity's Guaranteed Income Fund. But, under current KiwiSaver legislation, you need to be at least 65 years of age and have been in a KiwiSaver scheme for at least 5 years to be able to draw on your KiwiSaver investment. If you're approaching 65, and want the guaranteed income to start immediately, Simplicity's fund is probably not for you.

2. Investing your money in a term-deposit
Current interest rates offered by banks are around 3% to 4%, and there are no entry or exit fees. Best of all, you can access your money at any time. But, you will be paid your interest, i.e. income, in lump sums and not fortnightly like Lifetime, and there is no guarantee that interest rates will stay at their current level - if they fall, your annual investment income will be lower. Conversely, interest rates generally follow the level of inflation, so there is some form of inflation protection which Lifetime does not include in its standard offering.

​3. A diversely invested portfolio, designed to withdraw money based on your age
Many funds exist to help retirees manage their money - we cover these in our investing guides.

No – you receive your Lifetime payments in addition to your superannuation fund, which is inflation-adjusted every year by the government. Lifetime simply offers a ‘top up’ to your existing superannuation payments.

Lifetime Income Limited is the insurance company, and it is licensed by the Reserve Bank of New Zealand. It has a B- credit rating, which is one level above C+ ("marginal") per its rating agency A.M.  If the parent company - the Retirement Income Group goes bankrupt you will have three options:

1. The funds trustee, the Public Trust, may place the guarantee with another Insurer or
2. You will have your account balance paid back (meaning you can get back whatever is left of your original investment less income received plus net investment returns), and your Lifetime income guarantee value paid out of reserves held in a separate statutory account supervised by the Reserve Bank of New Zealand or
3. You will continue to receive your guaranteed income for life (funded by the reserves specifically held for this purpose)

Currently, you can invest up to one million New Zealand dollars.

Firstly, your guaranteed income stops. Secondly, any balance remaining from your original contribution will be made available to your estate, less a 0.125% withdrawal fee.

Yes, up to 20% at a time. A charge of 0.125% applies, meaning if you take out $10,000 you will receive $9,987.50 as Lifetime takes a $12.50 fee. You can withdraw more, but this means you will exit the entire scheme.

Because you contribute a sum of money upfront, receiving it back as a part of your 'guaranteed income' is tax-free (because Lifetime is paying you your own money). Per Lifetime's terms and conditions, tax is only paid on your investment returns from the balanced fund. This is paid on your behalf by Lifetime before you receive it. 

As our data indicated above, unless you retire at 65 and live beyond 95 years of age, Lifetime will work out to be more expensive. This is due to the ongoing fees charged, the entry and exit fees. There is also the added risk of inflation eating away guaranteed income, where as term deposit interest rates tend to move in line with inflation rates.

1. If you have proven success in managing your own money.
Lifetime's policy basically serves to manage your retirement funds in exchange for providing you with a fortnightly income. You are charged a fee of 2.35% per year of your savings to do this. If you have a proven track record of looking after your money, Lifetime's policy is unlikely to be of value to your retirement. 

2. If you have enough money to meet your needs during your retirement, even if you live to 110 years old. 
If you have a lot of assets and believe these will last all of your retirement years, and can sell-down your assets without causing any financial stress, Lifetime's policy is unnecessary.