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Which longevity product yields the highest income?

The report modelled average annual retirement income from three types of longevity products for retirement income. Here's what came out on top.

It found allocating 100% of retirement assets to a group self-annuity starting at 67 would yield the best results, at $44,000 in average retirement income.

This was $400-$1900 higher per year than other options.

To make the comparison, the report created a hypothetical longevity product. It allocated 5% of balance at retirement to buy a no-frills deferred polled annuity product (like a deferred group self-annuity).

The longevity product kicked into action from age 92, making CPI-indexed payments. Its net earnings were assumed to be a conservative 3.7% (assumed return of 6.2% minus fees of 2.5% per year).

"This product is one of many longevity products that could provide retirement income and longevity protection. To ensure its appropriateness, analysis compared this longevity product type to other possible retirement products," the review said.

It then compared it to three other products as follows:

  • A 100% allocation to group self-annuity starting at 67
  • 60% in an account-based pension and 40% in group self-annuity starting at 67
  • 95% in an account-based pension and 5% in group self-annuity that starts paying at age 85
  • And lastly, the hypothetical product 95% in an account-based pension and 5% in group self-annuity that starts paying at age 92.
The first combination of 100% group self-annuity was the most effective, yielding annual income of $44,000, followed by the 60/40 split that yielded $43,600.

The hypothetical example yielded the least at $42,100. The 95/5 split with self-annuity starting at 85 delivered $43,100.

The report also summarised stakeholder views on default retirement income products, such as CIPRs, which were generally supportive.

It also suggested adding insurance for aged care could be beneficial to retirement income.

"Other products that could improve retirement outcomes include long-term care insurance, for people who are uncertain if they are likely to need to fund aged care costs...If changes are made to encourage greater personal provision for aged care costs following the Aged Care Royal Commission, long-term care insurance may make aged care costs more affordable for people and give them the confidence to draw down their retirement savings," the report reads.

"If arrangements stay the same, more information and guidance about the likely costs of aged care, and the fact that it is not necessary to fund costs through a lump sum, may negate the need for long-term care insurance."

Read more: Aged Care Royal Commission
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