NetActuary

UK Pension Reform

The UK State Basic Pension and the State Second Pension (S2P) will be merged into a single tier state pension to be introduced in April 2017.  Some of the provisions are:

• It will be a flat rate amount above the current means tested minimum income support - currently £142.70 per week for a single pensioner.
• To qualify for part pension requires the individual to make national insurance contributions (NICs) for a minimum of seven to ten years.  The full amount requires 35 years of contribution history.
• There will be deferral provisions for not accessing but rather receiving an increased pension later.
• Indexation will be in line with earnings.
• Current pensioners and those who reach State Pension age before April 2017 are not affected.

These changes will mean the end of contracting out.  For UK residents migrating to Australia, it will result in large amounts of benefits having to be remitted as pension payments under the ITAA 1936.  Currently, one can move benefits accrued under the contracted out provision in the employer's fund.

The NetActuary Team

Retirement Income Planning Objectives 2013

Happy New Year!

NetActuary hopes that from both your clients’ perspective and your own that 2013 is going to be a great year. The first blog of the year is consequently more reflective about changes we can make to help drive that outcome. While complexity is bad, oversimplification is equally so. I would love to see an end to the debate about what is a safe withdrawal rate in retirement.  We need to think about the concept in a dynamic manner if we are to achieve real security.  We don't have to make a call on the withdrawal rates to the same extent if the client understands that the process can allow systematically made adjustments over the years - i.e. rebalancing.

I hope we are making decisions based on what has been a sustained period of very low returns.  The averages are meaningless at an individual level because that retiree may have panicked and not held course with equities.  In low interest rate environments, having dividend paying, high quality equities may be better than having bonds.  But when will this change?  The Christmas break has been too short.  I still want to bring dividends into the cashflow matching/immunisation modelling.  It may be imperfect, but it is still a useful approach.

In the real world, I think we owe it to clients to work with their core needs security as a separate exercise to the targeted plan.  I still don't know how one gets financial planners away from their spreadsheet love affair so that better risk management tools can be used.  Monte Carlo analysis is not the answer.  We don't just need to know that outcomes can be volatile.  What we really need to be able to do is evaluate the adjustments to alter the shape of the risk.  The Merton concept of trading "or more" in return for certainty is powerful.

What else do we need to do in 2013?  Address sovereign risk is one item.  The inability of governments to stop tinkering (sounds better than fiddling!) with super needs a response more than just complaints.  Super/Non Super mixes.  Health and care costs need to be considered in our Australian context.

I would love to see annuities - and especially deeply deferred annuities - become part of the debate.  However, realistically we are not going to have the legislative changes to allow that.  NetActuary would like to develop tools which allow planners to show the mortality credits provided by annuitisation more directly.

So...my NetActuary resolution for 2013 is to make meaningful advances in helping design retirement income strategies that enhance client retirement risks management capabilities.

Brian Bendzulla - The NetActuary Team