Why you should probably rethink longevity risk

Australians are living longer than ever and certainly living past the backward-looking life expectancy estimates often relied upon by financial advisers. This means it’s very easy to underestimate longevity risk. 

So, how do you know if you’re thinking about longevity risk in a way that will give your clients the most confident retirement? Here are some important insights for advisers today. 

Living longer and the fear of running out 

Living longer and outliving retirement savings is a real concern for many Australians.¹ In fact, close to 50% of Australians are concerned they don’t have enough money for retirement - it’s the most common fear experienced by retirees.² 

This means there’s a risk of retirees underspending. And while underspending might not seem like a problem, it can lead to retirees living a lower quality, less comfortable life in their later years. 

The government has recognised this risk³ which has prompted the development of innovative retirement income solutions that can offer generous tax and Centrelink treatment, and a number of compelling benefits. 

New ways to address evolving retirement challenges 

For the past 30 years lifetime annuities and account-based pensions have dominated the retirement landscape. While account-based pensions give retirees flexibility around investment choice and income drawdown, they don’t give the certainty of an income for life, contributing to the fear of running out. On the other hand, annuities give retirees the certainty of a lifetime income, but might not offer the flexibility to adjust income or control investments. 

But there’s another, newer and lesser-known option, that offers both flexibility and an income for life — Innovative Retirement Income Streams (IRIS). 

In 2017, the government prompted the development of IRIS⁴ with the goal of helping to: 

• Give more certainty with a higher income for life, compared with typical account-based pensions 
• Boost retiree confidence to spend more of their super savings 
• Deliver more flexibility than traditional lifetime income products   

And it’s not only the government that’s been eager for new approaches. Some licensees have made big moves requiring advisers to consider longevity risk, with some introducing it into their retirement philosophy.   

While full capital access is restricted under the super laws, an IRIS can give some compelling benefits: 

• An income stream for life, giving clients more comfort and the confidence to spend 
• Potentially better Age Pension entitlements, with asset and income test discounts 
• Some allow access to a full platform of investment options, allowing you to tailor client portfolios in line with their investment philosophy and risk profiles 
• Some top up retiree accounts with an insured annual bonus 
• Some allow you to develop new strategies by using deferral options and drawdown flexibility to provide improved outcomes for a broader range of clients. 

How you can use an IRIS to deliver better outcomes for your clients 

MyNorth Lifetime is one example of an award-winning⁵ IRIS that can deliver a higher income for life when compared to typical account-based pension income rates. 

Justin Hyland, principal of Sydney-based Hyland Financial Planning⁶ has had success using MyNorth Lifetime and says the Age Pension benefits have been well received by clients. 

“We know that for retired clients, the ability to access the Age Pension not only matters to them psychologically, but it can also make a significant difference to the longevity of their funds”, he says.  

“Clients typically tell us, ‘We should have set this up years ago’. And this is one of the best affirmations of good work.” 

Mina Nguyen, Director of Essense Wealth in Melbourne,⁷ has shared her top three reasons for using MyNorth Lifetime, “Longevity, lifestyle and peace of mind. It’s given clients clarity they can retire early with the level of income they need for a long period of time.”   

Mina and Justin’s clients aren’t alone in experiencing these benefits. Analysis of more than 1,500 customer accounts on North found that Australians using MyNorth Lifetime in their portfolios are able to retire earlier and saw an average uplift of 50% on their total income.⁸

AMP Director of Retirement, Ben Hiller notes. “In just over two years, MyNorth Lifetime is already delivering a significant uptick in both financial confidence and security for Australians who want to enjoy their retirement to the fullest.”