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Minimum deferral periods a shackle for DLAs
Arbitrary, "one-size-fits-all" deferral periods on deferred lifetime annuities (DLA) will impede optimal retirement outcomes for individuals, investment management firm Challenger said.
Chief executive of Challenger Life Richard Howes argued for more flexibility as this well allow for better tailoring, a larger insured pool and potentially higher income.
"Generally speaking, we'd expect retirees to find longer deferral periods far more attractive than shorter deferrals anyway," he said.
"The income payments on long-dated DLAs will be significantly higher due to compounding and the earning of mortality credits between purchase and payments commencing."
His comments follow the release of a Treasury discussion paper on the review of retirement income regulation in July, which accepted the current rules are hindering post-retirement products.
The paper said a minimum deferral period would be in line with the aim of the product — that is, a type of longevity insurance that provides income if the member outlasts their life expectancy.
It lets them draw down on their other savings with more certainty up to that period, it said.
But it accepted that not setting a minimum deferral period would let product providers offer DLAs with very short deferral periods, which would be like an immediate annuity with a ‘drawdown holiday' in the first few years, in return for higher annual payments.
Howes said DLAs should be defined as a pension under the Superannuation Industry (Supervision) Act 1993 so it can be exempt from the earnings tax and benefits tax.
"Non-commutable DLAs are a risk product and like other risk products shouldn't be subject to tax before benefits are paid," he said.
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