Bumpy road ahead for advisers

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Life annuity sales have been the strongest they’ve been in nine years, according to industry research Plan for Life. And with Government changes on the tax treatment of deferred lifetime annuities (DLAs), advisers need to start talking to their clients about their longer-term future.

Challenger general manager, marketing, Stuart Barton says that there is a “very outdated and not-well-informed” perception in Australia that lifetime annuity sales are at a “trickle” or a standstill. Although the market did drop to a trickle before the GFC, when a special security benefit to the product was removed by the Howard Government, Barton says that they have seen a boost in the product over the past 12 months.

He says that although advisers are doing a good job of raising longevity risk awareness, clients are very much more concerned about what they can do in the next five years than what’s going to happen in the next 10-15 years. That’s where DLAs come in.

“[A DLA is attractive] because it enables greater consumption now. It dovetails perfectly with the way an adviser might be advising a client with that near-term focus.”

Barton says the product provides advisers and clients with a finite period of time that their super has to last, making life easier for both parties. “It’s an easier conversation for an adviser to have…Rather than saying ‘we don’t know how long this money needs to last so let’s cross our fingers and hope for the best’, they can advise with a greater degree of certainty.”

However, JP Morgan says, “It will take some very skilful financial advice skills to convince retirees to lock a portion of their superannuation money for another 20-30 years.”

The answer to this, says Barton, is constant income layering, which fits with the way people think about their budgeting, planning and expenditure.

“Think about your clients, the way they get paid and the way they budget, and structure a portfolio in retirement that reflects that same cashflow. When you get paid, you take care of mortgage or rent, and then pay for food and gas. Any discretionary money is spent on entertainment…Structure a portfolio the same way because a client’s going to understand that.”

Something like DLAs are a good way to start a conversation about the longer term future of the client’s wealth rather than just those first few years… The beauty of this product for the baby boomer generation – you might remember the healthiest and wealthiest generation ever – is that it actually enables greater consumption in those early active years of retirement.”

JP Morgan says DLAs will be easier to sell than lifetime annuities, as the cost is in the $20-$50k range, and would appeal mainly to clients with savings between $300k and $700k.

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