What are the options for retirees with some appetite for risk?

Most people are finding their retirement savings inadequate, leading to more retirees willing or needing to take some risk with their savings.

Retirees are generally risk-averse, but an increasing number of people are realising that they have to take some risk with their life savings after retirement if they want to avoid a substantial impairment to their lifestyles.

Apart from the lucky few, most people find that despite saving for their pension over their working life, inflation and inadequate savings eat away at their ability to continue to live comfortably.

This has resulted in an increase in retirees willing or needing to take some risk with their retirement savings, and so an increasing trend towards favouring living rather than fixed annuities.

Among them, however, there is still a wide range of risk appetites. Conservative investors, who are the majority, generally believe that the markets are too volatile and growth too uncertain, and so focus their behaviour on preserving investment value investing in what are called ‘lower risk’ investments such as balanced funds, according to David Lloyd, managing director for innovation at Liberty.

But inflation can cause long-term depletion of capital in real terms as the potential growth in the value of these funds over the long term is relatively low. Or, put another way, as Lloyd says, investing in cash (the least volatile fund) is actually the riskiest thing to do.

More aggressive investors, making up a minority but growing percentage of retirees, are willing to take some more risk in order to increase their expected returns – they are more optimistic that the long-term market will go up and investments will grow but even they, says Lloyd, are still mindful of possible short term setbacks meaning they don’t invest as aggressively as they should or need to.

While a few investors with some financial knowledge manage their own stock market portfolios, most rely on advisers and financial institutions to invest on their behalf and expect them to find suitable investment options based on their individual risk and return profile somewhere along the conservative to aggressive investor scale.

For companies providing retirement funding options, increased willingness by investors to take on more risk poses something of a dilemma, as they want to offer products that increase retirement vales, but with the least amount of risk to retirees’ life savings.

Lloyd says Liberty found that customers wanted to harness the power of the stock market to increase their retirement standard of living and what legacy they would leave their heirs but all were wary of potential stock market dips.

Liberty set itself the objective of allowing retiring investors to take the risks they needed to, whilst still being able to select any combination of SA’s top performing funds at any time – one of the key benefits of the linked investment service provider (LISP)-style living annuity products.

As a solution, Liberty has launched the first return guarantee on a LISP-style product. Its Bold Living Annuity offers a quarterly high water mark return guarantee, allowing investors to choose any mix of funds at any time from a broad range of asset managers that LISP-style products offer, with a high water mark guarantee on the returns one’s choice generates. “This can only be done by creating a hybrid LISP/Life company product,” says Lloyd.

The high water mark feature means that the return guarantee rises as ones’ funds do in any quarter. For example, once the selection produces an aggregate return of 25%, investors cannot experience a negative return for the rest of the guarantee period, irrespective of which funds they may choose going forward. This return guarantee applies to your income withdrawals, your value on death or after five years says Lloyd.

The way Liberty charges for this rising return guarantee is also very innovative. There is a once off fee of 1% (equivalent to less than 0.2% per year) and its only if a customers’ portfolio of funds produces returns above 14% a year (in which case the guarantee will have risen) is there a further charge. This performance fee charge is 20% of any return above the 14%.

In essence, Bold enables investors investment flexibility and the ability to have inflation-beating targets with protection from major market downfalls.

Investors can therefore aim for inflation-beating growth in the long term and the potential for high returns.

However, and this is where investors need to be aware of the risks, there may be short-term volatility in prices and therefore returns.

Bold enables investors to take on additional risk in order to maximise return values, but at the same time limit the risk which many retirees worry about.

As the investment can pass to beneficiaries on the investor’s death, it also enables retirees to leave a legacy.

Lloyd says the value of Bold annuity is that its designed so customers can take on a more stock market exposure than they otherwise would, this increases their expected returns – which helps offset the cost of the guarantee.  

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The problem with a guarantee like the liberty one discussed above, is that there is no guarantee your counterparty (liberty) will be in a position to honour the guarantee when you need it.

Insuring against a stock market crash is not like insuring against a car crash. The insurer can’t pool the risk- when the risk shows up everyone who is insured will claim at the same time.

That is why insurance company stock prices tank so dramatically during a financial crisis, the market knows that they will be bankrupted if they have to meet their guarantees.

Without government bailouts 2008-9 would have seen many insurers defaulting on their guarantees.

Guarantees are a great way for insurers to leverage their balance sheets to earn easy profits – but the poor client who sacrifices a huge % of their retirement income to pay for these guarantees will find that this same balance sheet is worthless when they need it most.

Any “innovation” coming from Liberty would have to be looked at extremely carefully. This is a company that is historically well known for looking after itself first and foremost. Any benefit an investor may receive is purely coincidental.Liberties cancellation “penalties” have always bordered on the criminal.

These so called INSURANCE companies that stuffed our pension payouts (with high initial and ongoing fees) are now morphed into specialist INVESTMENT houses. Ethics and trust down the drain! I have taught my children to stay away from these new so called Investment houses.

End of comments.

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