Guaranteed Retirement Income NZ
In many countries a retiree can convert savings into a guaranteed income for life by buying an annuity. New Zealand has almost no retail annuity market. A handful of products exist, the choice is narrow, and most people will never be offered one.
That sounds like a serious gap, and it is smaller than it appears, because New Zealanders already hold the best annuity in the system and do not think of it as one.
The three things to remember
NZ Super is an annuity: lifelong, inflation-adjusted and wage-linked. The retail annuity market here is very small. And the risk it addresses is living a long time, not investment loss.
What NZ Super actually is
Strip away the language and NZ Super has every feature an annuity buyer is trying to purchase. It pays a regular income. It pays for as long as you live, however long that is. It is not exhausted by living to a hundred. And it is adjusted annually, with the net rate for a qualifying couple maintained within a band set by reference to the net average ordinary time weekly wage.
That last feature is the valuable one and it is stronger than inflation indexation. A wage-linked income keeps pace with living standards rather than only with prices, and a commercial annuity offering that would be extraordinarily expensive.
What it would cost to buy
One way to see the value is to ask what capital would be needed to produce the same income. Using an illustrative income of $30,000.00 a year and an illustrative 4 percent withdrawal rate:
NZ Super rates change annually and depend on your living situation and tax code, so no rate is quoted here. The 4 percent withdrawal rate is a common rule of thumb rather than a guarantee and does not itself protect against outliving your money. Look up the current rates on the Work and Income site and substitute them. The purpose of the arithmetic is scale, not precision.
The risk an annuity is for
People assume a guaranteed income product is about avoiding investment losses. It is not, primarily. It is about longevity risk: the possibility that you live considerably longer than your money was planned to last.
This is genuinely hard to plan for individually, because you cannot know the answer and the consequences are asymmetric. Plan to age 85 and live to 95 and you have a serious problem at the point in life when you are least able to address it. Plan to 100 and you may live far more frugally than you needed to, and leave money you would rather have spent.
| Approach | How it handles longevity |
|---|---|
| NZ Super | Fully, for the amount it provides |
| A commercial annuity | Fully, for the amount purchased |
| Drawing down a portfolio | Not at all, the money can run out |
| Living on interest only | Well, but requires much more capital |
| Home equity release | Partly, and it consumes the house |
The important structural point is that NZ Super already covers the base. The question for most retirees is not whether to buy guaranteed income, but how much income above that base they need, and how to produce it.
Why the market here is so small
Several reasons compound. NZ Super provides a universal base, which removes much of the demand. Our population is small, so the pool over which an insurer spreads longevity risk is thin. Long-dated instruments to back the promises are limited. And New Zealanders have historically held wealth in housing rather than in financial assets available to annuitise.
The effect is that a retiree wanting more guaranteed income than NZ Super has few products to choose from, and should expect any such product to be priced for a small market rather than a competitive one.
Whether the guarantee is inflation-adjusted or fixed in dollars, which over a 25 year retirement is the difference between comfort and hardship. Who stands behind the guarantee and how strong they are, since a lifetime promise is only as good as the promisor. What happens to the capital on death. Whether there is any ability to exit, and at what cost. And the fees, which in this category are frequently embedded in the pricing rather than stated separately.
The practical alternatives most people use
The single most useful thing to know
You do not need to guarantee your whole retirement income, only the part that covers what you cannot go without. Rent or rates, power, food, insurance and healthcare form a floor. Travel, hobbies and discretionary spending sit above it and can flex with circumstances.
Whether you own your home mortgage-free at 65 changes this calculation more than any investment decision. A retiree who owns outright may find NZ Super covers essentials. A retiree paying market rent almost certainly will not, and the gap is large, permanent and rises with the rental market. Anyone approaching retirement without secure housing should treat that as the central problem rather than a detail of it.
What this guide does not cover
NZ Super rates, eligibility, residence requirements and the effect of overseas pensions all have detail beyond this page and change, so check the current position with Work and Income. Specific annuity and lifetime income products are not assessed here and should be reviewed with a licensed financial adviser. Withdrawal rate examples are illustrations rather than recommendations. This is general information rather than financial advice.
Related guides and tools
- KiwiSaver after 65 guide, for what happens to the balance at retirement.
- KiwiSaver withdrawal guide, for how the money actually comes out.
- Inflation adjusted thinking guide, for why a fixed income is not a stable one.
- Term deposits guide, for the income route most retirees actually use.
Test Your Knowledge
Ten questions on annuities, longevity risk and NZ Super.
Sources: the New Zealand Superannuation and Retirement Income Act 2001, under which New Zealand Superannuation is adjusted annually and the net rate for a qualifying couple is maintained within a band set by reference to the net average ordinary time weekly wage. Rates change annually and are published by Work and Income, so no rate is quoted here. Withdrawal rate examples are illustrations rather than recommendations. This is general information rather than financial advice.