We have two major concerns regarding these GMWB for Life products. On average, they do not provide an effective guarantee against inflation risk, with real income expected to decline over the longer term based on our analysis and assuming a market risk-return scenario consistent with long-term historical averages. Furthermore, the likelihood that income payments will increase is subject to significant market timing risks, with flat, weak or volatile market performance in the earlier stages of the investment greatly reducing the likelihood of income increases. Secondly, while GMWB for Life products provide a CV and are therefore appropriate for estate planning, the CV is expected to be materially lower than the invested amount, and particularly in real terms.
Conversely, the SPIA product, Liquid Lifetime, provides retirees with complete income certainty; income is guaranteed to increase in nominal terms and remain constant in real terms. However, it ceases to pay a CV after year 15, so is unsuited to estate planning. On a total returns basis (expected income plus expected CV), Liquid Lifetime and GMWB for Life products were roughly equivalent.
Portfolio allocation
If considered as a part of an overall investment portfolio, S&P concluded that the allocation to these retirement products should be:
• Higher, the lower the level of wealth relative to budgeted expenditure, and vice versa;
• Higher, the higher the life expectancy of the retiree, and vice versa;
• Lower, the further beyond the age corresponding to the highest income rate; and
• Higher, the lower the retiree’s risk/return profile, and vice versa.
In our view, the value of GMWB for Life products for estate planning relative to traditional asset classes is ambiguous.
In a market where many advisers have been, some would say, overly reliant on equities or term deposits for retirees, we believe these retirement products are an important and valuable addition to the Australian investment landscape.
Rodney Lay is director, alternative structures, for Standard & Poor’s Fund Services.
I think you would be better to choose a term deposit over these products any day of the week..If you need to make 9% with a balanced fund to net 5% you are just not going to see any increase..sure you may in the early years if you are lucky – but once you “fall behind” in the asset value, you will never recover it..these products are all about flogging..and if you analysed the advisers selling them you would see my point.