The Retirement Commissioner says our “love affair” with property is preventing New Zealand's suite of financial products for retirees from growing like it needs to.
Diane Maxwell warns there are not enough ways for retirees to generate income from their assets and savings, yet says consumers are partly to blame.
“We get a bit worried about things beyond the property sector. We don’t put money into them, so they don’t exist,” she says.
For example, there is only one annuity product in New Zealand - Lifetime Income Fund - which was launched at the beginning of the year. There are also only a couple of providers, like Heartland Bank, that offer reverse mortgages.
Maxwell recognises there are often good reasons for retirees to be wary of these options, but says: “My big concern is we don’t have enough choices with these products… In a really good mature market we should have at least five providers we can choose from and then things get really competitive.”
“The problem is we’ve thrown so much money into property. We’re a bit nervous about the share market because people have been burnt in the past. We’re not really wanting to pay for financial advice, so we tend to stay away from some of those more complex products.
“And so we tend to be a bit of a one trick pony in terms of where we put our money. That’s not a great thing. It inflates the housing market.
“It also means that we don’t have those big pots of money that make decumulation products attractive to providers. Unfortunately, where the money is, is then where the providers are. We haven’t had the money there for the providers to innovate and drive and build the products to secure that money. So it’s a bit of a vicious circle in some respects.”
In saying so, Maxwell is not disregarding the benefits of property ownership when it comes to retirement. In fact, she’s previously spoken out in favour of young people getting on the property ladder if they can, as many would be better off working towards paying off a mortgage than blowing their cash on things they don’t need.
More competition needed in the annuity and reverse mortgage market
Maxwell makes these comments as the Commission for Financial Capability takes a fresh approach to this year completing its triennial retirement income policy. Rather than publishing a report at the end of the year, it’s taking a more staged approach to get people engaged.
It’s conducting research, hosting forums and talking with people in the community about a different aspect of retirement planning each month from April to October, and posting all its findings on its website.
Last month the theme was KiwiSaver and this month it’s decumulation - converting retirement savings into income.
Commenting on annuities, Maxwell says people are “suspicious” as many have been burnt by these in the past. Yet more options need to be made available.
“Other markets would have a plethora of annuities markets.”
As for reserve mortgages, Maxwell says: “The ones that we saw 10 years ago; we were a little worried about… These ones today are much better. They’ve got more guarantees.
She says the terms around the reverse mortgages being offered have been tightened, so you won’t be ousted from your house.
Yet the thing to remember with a home equity release or a reverse mortgage is that your interest compounds.
“It will chip into the equity of your home - there’s no way round that. But for some people they say, ‘You know what - that’s ok, I’m prepared to live with that because I can stay in my home’,” Maxwell says.
“In the UK it’s a pretty significant product. It’s becoming more popular and I think it probably will here inevitably.”
The other option retirees have is to release equity from their homes by downsizing.
Maxwell has received some positive feedback from people who have gone into retirement homes, but recognises smaller housing options aren’t always a whole lot cheaper, particularly if they’re newer and have better facilities.
The risks that stem from chasing yields in a low interest rate environment
She recognises retirees taking the safe option and contributing towards the $153.9 billion in term deposits held across the country, aren’t getting much bang for their buck in this low interest rate environment.
“The problem with a low yield environment… is that people chase yield and that means they can get sucked into scams more easily… It is a time where people do unfortunately put their money into some of the crazier options and the worry is that they lose it and they’re not going to be able to earn it back.”
Maxwell urges people to be wary of schemes they haven’t heard much about, or are based online or overseas. She reminds people to read the terms and conditions carefully, check the legitimacy of a scheme’s website and talk to people about it.
“No investment should ever be a secret. If it is, something’s gone wrong.”
As for investing in peer-to-peer lending platforms such as Harmoney or Squirrel, Maxwell says: “You can get bigger returns, you can have bigger risks. That’s the point. There’s a correlation between risk and return - always.”
She urges people to go in with their “eyes open” and do their homework.
“I worry when people rush into things,” Maxwell says, referring to investors who were rushed into investing in Blue Chip and then lost their money.
As for KiwiSaver, Maxwell admits withdrawals are fairly low at the moment, averaging at around $20,000.
Yet she’s sure that as the scheme matures and balances grow, financial service providers will put more effort into keeping funds secure and driving higher returns.
“I’m confident we’ll see a bit more innovation. I certainly hope we will - I’ll be calling for innovation.”
Regaining public trust in financial advisers
Maxwell recognises that if we want retirees to engage with a broader range of financial products to convert their savings into income, more emphasis needs to be placed on getting financial advice.
She echoes the comments an AMP director, Blair Vernon, made to Interest.co.nz last week, saying how shocked she is by the way people are prepared to spend money on all sorts of things, other than advice.
Maxwell’s concerned people often don’t know the difference between Authorised and Registered Financial Advisers, and how this affects what they have to disclose in terms of how much they’re paid and by whom (ie commissions).
“What a lot of people tell me is, they go to an Authorised Financial Adviser and they’re not sure if he’s good or not. They don’t know how to tell. He’s wearing a nice sharp suit and he’s looking smart and saying all the right things, but they’re not quite sure whether they can trust him. So I do think the industry’s lost a fair bit of trust.”
She hopes the Financial Advisers Act 2008 review currently underway will address some of these issues.