Q. I am in my mid 40s and expect my KiwiSaver to grow to over $200,000 over the next 20 years. In the UK where I grew up annuities were popular with retired people. How do they work and are they available in New Zealand?
A. An annuity is a contract with an insurance company. You enter into an agreement with them to pay you a fixed amount each month, for a lump sum payment. Essentially you take a gamble that you will live longer than average, while the insurance company will be better off if you die sooner rather than later. The insurance company takes various factors into consideration before making its offer including gender (because women live longer) and medical history - for example if you are a smoker or not.
Only one company in New Zealand, Fidelity Life, currently offers annuities. Because the demand for annuities is small the rates are not attractive, and so few people take them up. They are taxed at a higher rate than most KiwiSaver schemes, so are not tax-effective either. The market for annuities is much bigger overseas so the rates are better.
According to a Fidelity Life spokesman, if you handed over a lump sum of $200,000 today you would get a monthly annuity of around $642 per month, increasing by 3 per cent per annum to compensate for the rising cost of living. Your estate would get nothing when you died, so you would want to live for a long time.
If you look at those numbers, you'll see that $642 is not a very generous amount. It equates to just $7704 per annum, or a 3.85 per cent per annum return on your $200,000 with no capital repayment.