Retirement Commissioner red flags lack of financial products aimed at helping retirees convert savings into income

Retirement Commissioner red flags lack of financial products aimed at helping retirees convert savings into income

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.

'Suspicious'

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. 

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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In all cases, the best you can hope for is to set some gravy train ticket clipper up with a cushy ride on a pigs back.
While there is a very real possibility that one day they will announce that due to a series of poor management decisions they have nothing left to continue paying you with and while they are remorseful, there is nothing they can do to assist you further.
You can fool some of the people some of the time..........

Property is the only game in town.
Ask some of our politicians.
They have access to information that I am sure could reap them large benefits but most of them choose property over anything else.

Sounds like you might have been burned by a dud adviser Spinach. There are many good ones. Mine is a quality guy who has guided me for years and I’ve enjoyed excellent growth in assets values and a strong dividend stream. It is sad that a stock market crash a three decades ago and the more recent finance company debacle and has people locked by fear into low yielding bank deposits that will leave them exposed to inflation and hobble their lifestyle in retirement.

A monkey could have made money in these markets.

Thanks. I've been in the market most of my life and my comments are in respect of far longer than just 'these' markets.

Sure. I guess I'm trying to say that post-GFC is probably some of the strangest time periods in economic history and much has been geared in your favor. The mid- to long-term implications are unknown considering the world refuses to accept going down a path similar to Japan.

Yep, agree post GFC has been an 'interesting' period of exceptional gains. Was always going to happen though, given the over reaction in late 08 & early 09.
Risk of a correction is increasing but demographics and low interest rates are counterbalancing for the meantime.

"Over-reaction"? In what respect?

Panic selling. Balance sheets of most NZ corporates were in reasonable shape, debt moderate, EPS and other metrics sound. Middle of 2009 was happy hunting ground phase for contrarians.

Not sure that lack of cash will "hobble" lifestyle - arthritis and poor eyesight might have more impact on lifestyle.
As some people get older their expectations (and spending) reduce.

Sometimes I think it is the blind leading the blinder. I was recently looking at using an advisor who wanted me to use an investment administration company / custodial wrap account - basically all the investment are held by this company in you name - all dividends etc go into an account in your name - and all fees come out of it as well. The administration company wanted 0.3% and the adviser 1% - that I considered ticket clipping and I'm not sure for what - what benefits would be in it for me. Many of the arguments for using this service were poor to say the least e.g cash distributions paid to your nominated bank account - you will need to arrange the reinvestment of these distributions - so .....

I think it was devised for those who have no idea or time to manage their investments - which is fine but to me it seemed like ticket clipping.

Without doubt the most convoluted substanceless article . Retirement Commissioner indeed . What will she say when property prices start declining .

I would imagine she will say exactly the same as she says in the article - that it is a pity that there are not more alternative ways of managing wealth in retirement.

Retirement Commisioner says "Lack of Financial Products"

Immediate turn-off when those in-the-know promote product-flogging

Too many times the "Financial Advice" industry has been shown to be harmful. Both the companies and the individuals. It's not fixable and just needs to be eliminated. Even ordinary New Zealanders have worked that out, although the comissioner hasn't.

(Comment edited. Please refrain from personal abuse and stick to commenting on the issues. Thanks. Ed). ...You could get similar information by reading Mary Holm in the NZ Herald. Never once heard her mention Smartshares ETFs as an option, even though it has been an excellent vehicle since launch (not saying that will be so in the future). I've said before, her KPIs are likely to be based on some quantitative measure of increase in NZers' savings. Given that the majority of people save in their "homes", she's probably getting one mighty performance bonus. What she said in this interview is simply ass covering should the whole charade collapse in a heap.

She probably had a call from JK and Nick Smith to help out.

Well, in her position she could hardly advance one investment product over others, could she. Clearly people are not reading Mary Holm or they wouldn't be piling into a loony housing bubble or alternatively sitting with money in the bank, frozen in fear.

Well I would expect "unspecified ETFs" worthy of mention. Smartshares are the only provider of ETFs focused on the NZX I believe. Furthermore, Kiwisaver is effectively an "investment product", but nobody has any bones talking it up.

She has commented on Smartshares etc and has usually got a NZX employee to answer questions submitted by us ordinary people.

Well yes, she's not a CSR. She definitely seems to want to communicate with the hoi polloi, but I'm not hearing much that I think really opens people's eyes to what is going on and the confounding risks unfolding on a daily basis. As a commissioner, I would think that it is a responsibility.

Personal abuse? Good heavens.

The Interest HQ Drawing Room totally has a fainting couch.

Property is one game which is easy for many to understand and play, if they have the resources. Mums and Dads have become experts in this, without needing to have much financial intelligence. Pure demand and supply game. The government is taking care of the macro environment with more immigration, no tax, etc.
So how do you expect other financial investments to take off ? Kiwisaver is also similarly macro managed business for Funds managers, offered on a platter. The only two games, with assured returns and not much risk..

While I agree that our obsession with property is doing a lot damage at many levels, I can understand why people are so attracted to it. The tax angle alone is sufficient and it is such a sacred cow that no body wants to change that. The other major factor is that historically the equity markets have treated the average public very poorly, dare I say practically criminally. I have invested in shares for years and realised that most so called advisers were definitely not to be trusted. I realised that to every transaction there was another party and that a large part of the market was the large investment and insurance institutions. I got the impression that the brokers were loyal to their large clients and that average members of the public were the suckers that they manoeuvred into being the loosing ends of the deals that suited the large clients. Accordingly my advice is never use a broker and take responsibility for your own investment decisions because in any other situation you are viewed as somebody else's meal ticket. If you are not experienced and skilled to do this, use investment vehicles like Kiwi Saver or similar good managed funds.

And there have been some spectacular IPOs that plummeted in value after the initial euphoria and build up, leaving many ordinary investors burned badly ?

Yes, indeedy. And others that have gone spectacularly well. Your word euphoria is the key. Too much of that and not enough of the fundamentals. Such as .....generates power, kiwis need power, or, builds rest homes for fossils, NZ has an increasing number of oldies. Really complex stuff like that.

'Euphoria is the Key..'
Like that very much, Could be National's next year election slogan ?

Ha, didn't spot my own brilliance!. Reckon I could sell it to the Tories? mind you, after tonights green/labour love in JK is probably already feeling a tad euphoric

The worst examples of that are IPOs of repackaged established bushinesses, particularly where there is a Private Equity company involve. The other major category are initial start up companies. These are risky, only a few go on to be big successes, but at least the risks are obvious.

A market is a market, it cannot 'treat' anyone poorly. While I share your caution about advisers who are effectively tied to a limited range of products there are others who do a good job of profiling client needs and risk tolerances and will construct a portfolio to suit. I pay for advice and direct invest, works well for me but it's not for everyone. As you suggest, good managed funds will get you there. The alternatives (if you are not a property punter) are pretty bleak. In the end you have to do something, unless staring like a possum into the oncoming headlights is your thing.

Yep, might appear a contradiction but there’s an important qualification at the end of the para.

She “fully supports” young people taking money out of their KiwiSaver for their first home, as paying down a mortgage encourages them to put money toward a valuable asset, rather than blowing it on things they don’t need.

And I agree with her if the alternative is letting the cash run through your fingers.

I wonder whether the government could play more of a role in this. In the UK, pension contributions are made before tax (up to a limit) which makes them very attractive in addition to employers often contributing generously to many schemes. Giving pension contributions a tax advantage over property investment might actually encourage people to do it!

Any complaining about property concentration of exposure that doesn't hammer tax free capital gains is just missing the point.

A secondary issue is the tax policy surrounding foreign investments (FIF rules, assumed gains and no deductible losses) which discourages diversification outside the tiny and vulnerable economy of NZ.

Finally, any favoring of KiwiSaver from a serious financial perspective should be looked at most cynically.

Nothing to do with love affair of properties.

Has more to do with
1. the tax advantages and lack of taxes such as stamp duty of investing in property compared to other investment types.
2. The ease of credit
3. The lack of government action to reduce investor demand

All countries love properties.

So....what has she herself got other than property? Id be curious to see that as ratios of her own portfolio.

Can we have an interview asking that 'walk the walk" question?

The RC has made a valid point: there just aren't the products around. E.g. Lifetime Income Fund has been here all of 6 months, and the investment statement notes a credible risk as being essentially Novelty: the money shot:

..risk that there will not be sufficient demand for the Fund to make it economically viable. If the Fund is wound up, you will not receive your Lifetime Withdrawal Benefit but instead will be returned the present value of your investment in the Fund, which may be less than your investment and will be net of fees and costs. These costs may include the costs of establishing and winding up the Fund, and, depending on your level of investment in the Fund at that time, may represent a material portion of your investment. At this time we are unable to assess whether there will be sufficient demand for this Fund.

And this product is, quite simply, the only in its category......some 'market'.

For them as wot are Still Interested, here: www.lifetimeincome.co.nz

T'would be Interesting, Jenée, to interrogate interview a Lifetimer and inform us all whether Critical Mass has been reached,