Lifetime Retirement Income

Updated 19 January 2019

Summary of Lifetime Retirement Income

Lifetime Asset Management Limited (known as Lifetime) offers the opportunity to invest into a fund that, with the use of an insurance policy, guarantees fixed cash payment every year until you die.
Such retirement schemes are known as an ‘annuity’, and on paper, it sounds attractive to anyone first hearing about it. But there are many things you’ll need to understand about annuities before investing.
Annuities are not without their risks and may not be a suitable product for your retirement needs. In many cases, you can pay tens of thousands of dollars in fees during your retirement and have limited access to your money.

In this guide we breakdown what Lifetime is offering, how it works, what it costs, the advantages, disadvantages, alternatives and essential facts to make you aware before you go any further. We cover:

Know this first:

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!
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.
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.
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.
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 an 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.

So, what exactly is the Lifetime Retirement Income fund and how does it work?

By definition, an annuity is a "fixed sum of money paid to someone each year, typically for the rest of their life". In its simplest form, it is an insurance policy.
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.
The sum of money you pay to the insurance company will be invested on your behalf in a fund.
The guaranteed annual payment you receive will be made up from the returns your fund makes and is determined by the sum of money you paid the insurance company.
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 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 an 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 year until you die.
There is provision to withdraw lump sums from your fund limited to 20% per withdrawal. On your death, your estate receives any balance in the fund.

Be aware - Lifetime is an insurance policy, NOT an investment

It's critical to understand that an annuity is not an investment. The guaranteed income you receive every year is not a return on your investment - if it was, all the money you invest would be available to withdraw. But this is not the case - your money decreases year after year as fees are charged and your guaranteed income is paid out.
If you are told by anyone selling annuities that your guaranteed income is a return on your investment, this is not true (and also fraudulently misrepresenting the product).
And, if you go ahead with an annuity, you immediately lose ownership of 100% of your assets, are subject to withdrawal fees and miss out on any returns in excess of the guaranteed income you could have received from the assets you allocate to the annuity.

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 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.

Table 1 - Lifetime's benefit payment rate (guaranteed for life from the age you agree first to receive your payments)

Lifetime lets you start receiving your Lifetime Withdrawal Benefit at any time if you are between the ages of 60 and 90.
The age you choose to start receiving your Lifetime Withdrawal Benefit determines your Payment Rate, and the amount you'll receive fortnightly or monthly. For example, if you decide to start at 70, you will receive 5.50% of your protected income base every year, paid fortnightly or monthly.
Once you've chosen to start your Lifetime Withdrawal Benefit your Payment Rate won't change. In the example above, the 5.50% will be paid every year until the policy holder dies.

Age at first Lifetime Withdrawal Benefit Payment	Lifetime Withdrawal Benefit Payment Rate (percentage of Protected Income Base)
60	4.50% p.a.
61	4.60% p.a.
62	4.70% p.a.
63	4.80% p.a.
64	4.90% p.a.
65	5.00% p.a.
66	5.10% p.a.
67	5.20% p.a.
68	5.30% p.a.
69	5.40% p.a.
70	5.50% p.a.
71	5.60% p.a.
72	5.70% p.a.
73	5.80% p.a.
74	5.90% p.a.
75	6.00% p.a.
76	6.10% p.a.
77	6.20% p.a.
78	6.30% p.a.
79	6.40% p.a.
80	6.50% p.a.
81	6.60% p.a.
82	6.70% p.a.
83	6.80% p.a.
84	6.90% p.a.
85	7.00% p.a.
86	7.10% p.a.
87	7.20% p.a.
88	7.30% p.a.
89	7.40% p.a.
90	7.50% p.a.

Understand where your money invested, and assess whether it is safe

Lifetime invests your money in a ‘balanced fund’. This means it invests in global assets that are income producing, such as bank deposits and bonds, as well as global growth-focused shares. The purpose of a balanced fund is that it is not high in risk, but also should make a better return over time than money in a term deposit given it allocates some of your money to invest in the sharemarket.
Lifetime invests money in ANZ term deposits, SmartShares, and with fund managers Vanguard and Harbour Asset Management.
Because Lifetime’s fund value goes up and down every day, there is a risk that if you want to withdraw money, your balance could have fallen if global markets have dropped. But, this won’t affect your guaranteed income payments which are fixed for the rest of your life.

A common example:

You invest $100,000 and you are guaranteed to be paid 5% per year net of fees and tax.
Every year, you receive $5,000, as per your agreement.
Some years on, there is a global crash and your investment balance falls to $70,000.
You will continue to receive the $5,000 per year.
While your income guarantee is protected, your investment balance can fluctuate. This means if you wanted to withdraw 20% of your fund, you would only receive $14,000 (20% of $70,000) and not the $20,000 as per your original investment.
Also if, for example, you withdraw $10,000 from a $100,000 protected income base, your ongoing benefit will reduce by the same proportion. So if you received $5,000 per year, after the withdrawal you would receive $4,500.
Lifetime aims to make sure the underlying funds are invested in relatively ‘safe’ assets that are not volatile to market shocks.

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.

Lifetime charges fees - and they do add up

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, but you’re limited to 20% at any time, 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.

Lifetime Income Payments vs Bank Deposits

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.

Every year, we assume the Fund Performance will be 6.50% (which is consistent with what Lifetime says they expect).
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.
The Management Fee (1% on your closing fund balance) and Insurance Fee (1.35% on your original payment to Lifetime) are also deducted.
Finally, a Cash payout is made (i.e. the guaranteed income you receive fortnightly or monthly).
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.
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.
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).

Note: We understand that payments to policyholders are made more frequently than once a year, and that fund performances fluctuate year over year - this example is a simple walk-through of a typical annuity.

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

Every year, we assume the Bank Interest rates will be 3.50% (which is consistent with 2018/19 term investment interest rates).
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.
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.
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).
By the age of 95, your investment is worth $1,309, and you have received $150,000 of payments over 30 years.
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.

Conclusion
We conclude that unless you live beyond 95 years of age after retiring at 65, a bank deposit provides better value for money than Lifetime's offering.

Inflation is Lifetime's Biggest Enemy

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.
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%.

Advantages of Lifetime:

Guaranteed income for life and a Protected income base - once you start receiving your guaranteed income for life, no matter what happens to the fund you are invested in, you will always receive your ongoing payments, even if your payments and fund performance reduce your fund to $0.
Withdrawals are possible - you can withdraw a maximum of 20% of your investment at any time, and there is no limit on how many withdrawals you can make. You will pay a 0.125% fee on any sum you take out - so if you withdraw $10,000, you'll pay a $125 fee and receive $9,875. The percentage you withdrawal also affects your ongoing guaranteed monthly income. For example, if you withdraw $10,000 from a $100,000 protected income base, your ongoing benefit will reduce by the same proportion. So if you received $5,000 per year, after the withdrawal you would receive $4,500.
Joint investment benefits - Lifetime can accept couples where the age differential of each partner is ten years or less; for example, a 64 and 57 is covered, but if you are 64 and your partner is 53, you won't be eligible. The benefit is that if one person passes away, the surviving person will continue to receive the Lifetime withdrawal benefit for the rest of their life. There is a higher insurance fee for this - single policyholders pay 1.35% where as couples will pay 1.75% on their protected income base.

Disadvantages of Lifetime:

Unless you take out a specific inflation-proof policy, you are not inflation protected – meaning whatever you agree to be paid could, if past inflation is anything to go by, be worth 25-40% LESS by the time you’re 80. Right now, in 2019, we have low inflation. But if it goes higher, as some economists have said it will, the payment you receive may be worth a lot less in real terms, and would not even keep up with rising costs. Such an instance would create a miserable situation as we explain below.
High ongoing fees which eat up your investment year after year - fees can add up, and we discuss fees in detail below.
Lifetime is an insurer, not a fund manager, and has a B- credit rating - if it goes bust, your guaranteed income will probably stop. Public Trust holds the insurance policy for the benefit of the investors, but this is worthless if Lifetime itself goes bankrupt.
Entry and Exit fees - when you invest, 0.125% of your money will be charged to join the Lifetime fund. If you decide to withdraw or leave the fund altogether, another 0.125% is charged for each withdrawal.

10 Must-Know Facts About Lifetime Retirement Income’s Fund

Lifetime is an annuity, which means it’s a contract between you and an insurance company to provide income for life

You may think an annuity is an investment, but it is not. It is a contract, where the risk involved in committing to pay you every year is held by the insurer. Lifetime’s product locks you and the insurance company into contractual obligations. You pay 1.35% of your initial investment value every year as a fee to the insurance company. In return, the insurance company gives you a fixed net return between 4.50% to 7.50% depending on when you retire.

Products like Lifetime have been around since Ancient Rome, where Romans would pay a company a lump sum in return for guaranteed annual payments for life. Today, in New Zealand, retirees have the same money worries about their retirement as the Romans.

Investments in your KiwiSaver fund, the sharemarket or even a term deposit with a bank don’t provide regular income. For example, shares in Air New Zealand don’t pay you a guaranteed amount for owning them as dividends are only paid twice a year and vary depending on the profitability of the company. As such, Lifetime (and products like it) are becoming more popular as retirees look towards annuities as an option to replace income streams, i.e. wages from their employer.

Lifetime’s product offers what no other investment can do – it provides guaranteed income for the rest of your life no matter how long you live. It works similarly to the superannuation payments you receive from the government after you turn 65 with the main difference being that government superannuation is adjusted regularly for inflation.

Know this: You will be charged fees, but this will only affect the value of your account balance and not your guaranteed income - our income example demonstrates this.

The younger are when you start receiving your guaranteed income, the lower the percentage payout you will receive

Lifetime pays you 4.50% of your investment if you retire at 60, and up to 7.50% if you retire at 90. The younger you are when you receive payments, the longer your life expectancy is and the smaller your payments will be. It’s all based on what the insurer can afford so neither you or the insurer have an advantage.

You are paid fortnightly, for the rest of your life

Every two weeks, Lifetime will make a payment into your bank account. You don’t have the option of weekly or monthly payments, or a lump sum payment either. You’ll need to manage how you spend the payments as they can’t be advanced or deferred once you start receiving your payments.

Lifetime offers a ‘Protected Income Base’ advantage

You can defer your payment data and take advantage of market movements. Lifetime lets you sign up, invest and defer when the payments begin. This lets you contribute as much as you can to maximize the protected income base and by receiving the guaranteed income later you will receive a higher percentage rate. You only pay insurance fees which you start receiving your guaranteed income.

The minimum investment is $25,000

There is a minimum investment of $25,000, and a maximum of $1 million, and Lifetime recommends investing a maximum of 40% of your savings into their product.

Your payments are net of tax, so you won’t have any problems from the IRD

Lifetime pays the IRD tax on your behalf, so the guaranteed income you receive every month is net of tax. You are taxed at your prescribed investor rate (PIR).

There are no fees if you want to withdraw money, but there is a limit on how much you can take out

You can take out 20% at any time, and a 0.125% fee applies on every withdrawal. If you take out more than 20%, you will be forced to cancel the policy.

Lifetime’s product, and annuities in general, are not growth products

If you want to invest in something which gives you market growth, Lifetime is probably not the right choice given the fees and balanced fund focus. Low-fee funds like Simplicity’s Growth fund, or investing in growth-focused SmartShares, are probably more suitable.

Lifetime makes the most money when clients die just before their account balance runs out

The most lucrative client for Lifetime is one that dies just before the fund balance approaches zero. This because Lifetime will charge the management fee and insurance fee every year until then. If a client dies early, then they have to pay out the fund and Lifetime will not receive any future income in the years to come.

Guarantees of income for life are only as secure as Lifetime

Unlike bank deposits or term investments, there is NO government protection for your money; the government does not guarantee Lifetime’s insurance policy, meaning if it goes bankrupt later on you have no protection. Because of this, it’s essential to consider the financial strength of the insurer and know what its credit rating is. Currently, it’s rated a B- by A.M. Best Company (a major credit rating agency that specialises in insurance companies). This isn’t classed as ‘Fair’ and one grade above ‘marginal’.

Alternatives to Lifetime

1. Simplicity
Simplicity offers the KiwiSaver Guaranteed Income Fund, which offers the same benefits and structure as Lifetime, but for a lower fee. 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.

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.

Lifetime FAQs

Is Lifetime right for you?

MoneyHub is not a financial adviser, and the answer is 'it depends on your circumstances'. If you have a significant level of assets and income streams, and don’t expect to need to depend on your government superannuation payments in retirement, you are less likely to need a guaranteed income product. If you don’t have a lot of savings and would appreciate knowing you will always receive the same amount of money for the rest of your life, Lifetime could be more attractive to you.

Does the money I receive from Lifetime Retirement Income affect my New Zealand superannuation payments?

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.

Who is the insurer who provides the ‘guaranteed’ income, and what happens if they go bankrupt?

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 Lifetime goes bankrupt, your fund is protected (meaning you can get back whatever is left of your money), but your guaranteed income may stop if Lifetime ceases trading.

How much can I invest in the Lifetime Retirement Income fund?

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

What happens when I die?

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.

Can I withdraw money from the fund?

Yes, up to 20% at a time. A charge of 0.125% applies, meaning if you take out $10,000 you will receive $9,875 as Lifetime takes a $125 fee. You can withdraw more, but this means you will exit the entire scheme.

What are the tax implications for the fund?

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.

Is the Lifetime Retirement Income better than putting my money in a bank?

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 added risks - the lack of control you have over your money, and the risk of inflation eating away guaranteed income.

Who is Lifetime not suitable for?

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.

Our View: Lifetime, and Annuities in general

In general, we are not fans of annuities. The fees are high, the guaranteed returns can be eroded by inflation and you don't have control of your money.
Most importantly, annuities are not investments - they are insurance policies. What you contribute on day 1 is not what you can get out, or what your estate receives when you pass away.
In the case of Lifetime, you are paying 2.35% per year on the original amount you contributed, but will only receive between 4.50% and 7.50% and any shortfall in your guaranteed income is taken from your original contribution.
The fees charged up - a $100,000 fund will incur over $40,000 in fees over 20 years.
Lifetime has a B- credit rating; if it goes bankrupt, your guaranteed income goes with it. Insurance companies do go under - American giant AIG went bust in 2008, building insurer CBL failed in 2017-18 and well-known AMI needed to be bailed out by the government after the Christchurch earthquakes. While CBL and AMI didn't sell annuities, insurance is a risky business.
If you are determined to pursue guaranteed income policies, Simplicity offers the same thing for much lower fees. Alternatively, it is becoming popular to consider a broad range of investment opportunities that are age-appropriate.