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Wednesday, 28 April 2021

Created new QSuper account with the intention to setup a Lifetime Pension when I retire


An article in yesterday's 'Money' column in the SMH about a new retirement income product from QSuper they call a 'lifetime pension'. It is quite similar to a standard lifetime annuity product (such as is available from Challenger) but with a few attractive features for me:

* it will pay a fortnightly pension for life (although the income amount isn't guaranteed like in a standard lifetime annuity).

* the underlying investment is a 'balanced' growth option, rather than the usual mix of fixed interest investments normally underlying a lifetime annuity. Theoretically you are exchanging the certainty of a fixed income rate (that can be indexed to CPI) for a variable income rate that is affected by the performance of the underlying 'balanced growth' investment pool. The old risk-return trade off.

* the income rate is adjusted annually based on how the investment pool has performed compared to a 5% benchmark net return. So if the return is more than 5% the pension rate will increase, but if the pool returns less than 5% net return the pension rate would decrease slightly (to prevent to pool being exhausted).

* while there is no fixed lump sum death benefit (life insurance), there is a guaranteed death benefit that corresponds to your initial investment minus the sum of income payments received - so you (or your estate) would be guaranteed to get you initial investment back even if you die a few years after taking out the lifetime pension

Currently for a 60 year old investing $30,000 (the minimum amount) into a lifetime pension the first year income stream would be $1,849. You can't invest in a lifetime pension until you reach a superannuation condition of release, such as being over 60 and stopping work. And the lifetime pension is purchased using superannuation money (such as in a QSuper accumulation account).

I decided to open a QSuper account (it took literally two minutes to enter my details, address and TFN to open the account online) and I'll initially make a $100 monthly after-tax contribution (I already make the maximum before tax contributions via SGL and salary sacrifce of $25K pa, but I can also contribute up to $100K pa of after-tax contributions, at least until I hit the $1.6m total super balance cap).

I've selected to invest the QSuper accumulation account in a 50:50 mix of the Australian shares and International shares investment options, as this corresponds to my normal 'aggressive' asset allocation, and these options have a low total fee of around 0.24%, which is similar to the fees our SMSF pays for the Vanguard High Growth Fund. As there appears to be no minimum fee (or fixed weekly admin fee) for QSuper, it should make any difference to my total superannuation fees whether I am invested 100% in our SMSF or have a small amount invested in QSuper as well.

I'll probably end up accumulating around $100K in the QSuper account, so that when I retire (possibly at age 70) I can put that amount into a lifetime pension paying around $7,529 pa in the first year (the initial income payments increases slightly for each year older you are when you take out the lifetime pension). If I waited to take out the lifetime pension until I turned 80, for example, the initial income rate would be $10,834.

This is a lot lower than the initial payments (from age 95) would be if I took out a $100K deferred lifetime annuity from Challenger when I am 60 (with a 35 year deferral period), if I chose the option of not having any death benefit (which risk getting no repayment at all if I died before the deferral date). So I might end up taking out a combination of a $100K lifetime pension from QSuper and a $100K deferred lifetime annuity (with no death benefit, and deferred until age 95) from Challenger. The remaining amount of super (below the transfer balance cap) would stay in our SMSF and transfer into retirement phase, so I could adjust the annual pension payments (subject to the mandatory age-based minimum percentage) and take out lump sums as needed.

Given my great-Aunt is currently still alive at age 105, and two of my grandparents lived to 94, having some component of my retirement income stream guaranteed against longevity risk seems prudent.

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