If you transfer more than $300,000 you may choose to be invested in an individualised portfolio utilising an independent custodial service. This will give you:
More choices on where to invest.
Your own unique investment portfolio created specifically for you.
Tax deductibility of fees - the trustee of the QROPS plan makes these deductions You do not need to declare income earned on a superannuation plan as it is paid by the fund manager.
Usually a superior investment return compared to a standard, say, Balanced fund due to your uniquely constructed portfolio and tax benefits.
On-going investment advice. Your portfolio will be reviewed by your personal investment adviser every six months.
Access to your investment adviser as required.
Website access to check your investments at any time.
Larger pension funds require as much attention as other investment portfolios and need to be reviewed regularly.
If you have a smaller investment portfolio or are happy investing into a standard investment fund that is appropriate for your risk profile you can:
Contact your adviser from time to time.
Receive annual reports.
Be assisted with service requirements such as:
withdrawing a portion of your funds when you turn 55
switching from one investment fund to another.
switching into another superannuation QROPS approved scheme if desired. This would usually be for someone who wants to move from a standard fund to an individualised investment portfolio or vice versa. Switching schemes via Lyfords does not incur fees or penalties after the first two years that the funds have been transferred.
Investment advisers at Lyfords often help their clients to understand that their transferred pension funds and NZ Superannuation benefits will be insufficient to provide their desired retirement income. At Lyfords we prepare retirement calculations for you and provide recommendations on where to invest and how much more you need to save in addition to your current savings and accumulated pension funds to attain your desired retirement income.
Kiwis are generally optimists and poor savers. The majority believe they will be financially independent when they retire and have stopped earning an income but you need more than optimism to be financially independent.
If you are not saving and/or investing appropriately it is unlikely that you will be financially independent when you retire.
It is important to review your retirement savings plan on an annual basis to ensure that you are on track to receive an inflation adjusted, after tax, retirement income from your invested monies.
You and your devoted spouse currently have a combined income of $100,000 p.a. You earn $80,000 p.a. in your full time occupation. Your spouse earns $20,000 p.a. because he is older than you and works part time at the local DIY store.
Now that you 65 you are ready to retire. Your children are financially independent and you live in a house with no mortgage. Well done! You feel you can live off $65,000 in retirement.
In addition to your savings you will be able to receive NZ Superannuation for the foreseeable future but Governments can be fickle and there have been times in the past when NZ Super was offset against other income. This was called the Superannuation Sur-Tax.
The NZ Superannuation rates are set by Work and Income New Zealand (WINZ). Current rates
The following is a summary of some after tax annual incomes payable by NZ Superannuation:
|Single on tax rate M||$19,500|
|Single on tax rate S||$18,512|
|Married couple on tax rate M||$29,952|
|Married couple on tax rate S||$27,976|
The above table demonstrates a clear financial benefit of being single. The benefit of being married is that statistically married couples are happier and live longer.
If you receive New Zealand Superannuation it will be in addition to the income derived from your personal retirement income.
Is this enough?
It may be but maintaining a lifestyle when you are no longer working is probably more expensive than you realise. If you or your spouse suffer a serious illness such as a stroke or early dementia and need to move permanently into the hospital wing of a rest home your entire retirement income of $65,000 p.a. will be used to pay rest home fees. Sorry. That’s how it is.
Rest home fees are subsidised. In 2015 the author’s father paid $605 per fortnight from his NZ Super and an additional $313 per fortnight from interest from other investments totalling $23,868 p.a. The remaining fees, including a hospital subsidy, were paid by WINZ.
There will always be unexpected costs associated with living in the community.
The dog needs surgery. The cost is $3,000. What do you do? Put the dog down or pay for the surgery? Commonly the writer finds it’s not even the dog of the retirees, rather, their child begged them to let them have a dog when they were teenagers (and the parents were in their 50’s). A few years later the child left for university, or to travel the world, and imagined that the parents actually wanted the pet. What do you do?
The car tyres need replacing. Cheap ones cost $800, the safer ones cost $1,600. When you were working you would always buy the best quality products. Which ones are you going to choose now? Cheap or safe? Would you risk driving with your grandchild while knowing you had less safe tyres than you could have? Is the integrity of your priorities being compromised because of your limited income?
Your house has developed a leak and the general consensus, after discussions with builders and architects, is that the construction has a major fault which has worsened since recent earthquakes. Do you hope it will go away by itself? Or do you pay $85,000 for the repairs? What impact will this expense have on your retirement funds? You had applied for insurance to pay for the repairs but your leak had been there for sometime, long before the earthquake, and therefore your claim was denied. Several years earlier you learned that the original architect had moved to Buenos Aires. Address unknown. It doesn’t seem fair does it?
You live in your family home in Grey Lynn, Auckland. Your rates have increased by $2,500 p.a. because the value of your property has rocketed up. This doesn’t seem fair either does it?
Now that you have recently had to repair your house, pay for the vet bills of your adult child’s dog and replace the tyres on your car you can’t afford to pay the rates. What are you going to do? Will you leave your community and move to a lower cost area? Will a smaller house cost less to own? Will you move in with your children? (just kidding).
It looks as though your entitlement to NZ Superannuation will be a good buffer for these unexpected expenses.
Using the following assumptions:
- Age 65
- Balanced investor profile
- Investment returns are inflation adjusted and net of tax
- Funds required to age 93 = 28 years. If funds run out at that time, sell the house and move into a rest home or take a reverse equity mortgage.
You need a lump sum to invest of $1,150,000 to receive an after tax and inflation adjusted income of $65,000 p.a. for 28 years when you will be 93.
Is that the amount you thought you would need?
How much have you saved so far? Are you on track?
Is $65,000 p.a. going to be enough to maintain your lifestyle?
What are you going to give up in retirement?
How will you replace your car? Have holidays? Visit your grand children?
How will you pay for your health insurance? – oh you will use the public health system? – good luck.
Lyfords provide on-going retirement advice. It’s not just about transferring your pension
It is important to talk with a financial adviser on an annual basis to ensure that you are on track to achieve your retirement objectives. You have probably spent 30 to 45 years building up your wealth so it makes sense to protect it and ensure it grows as effectively as it can without taking excessive investment risks.
One solution to being financially independent in retirement is not to retire. You can only do this if you enjoy your work and have control over it which can work for the self employed but it’s an option with less certainty for employees. Your employer might not want to employ someone who is becoming more and more absent minded and works slower than younger employees who are being paid less.
As long as you have good mental and physical health it is reasonable to expect plan to continue to work far later than age 65.
In the days of yore, 20-30 years ago, the standard retirement age was 60. For those of us who have already reached this age and are still working 60 seems very young.
Rather than retiring suddenly investment advisers at Lyfords recommend reducing your work days to 4 a week for nine months of the year. Later, reduce them to 3 days a week for eight months of the year. If this is an option. If it isn’t maybe it would be a good idea to start working out how to become a consultant or a business owner rather than an employee.
A proprietary operation that can work without you.
There’s more to work than income generation. When your children have left home and you no longer have a mortgage on your house it’s great to have a business that can work while you’re having a holiday.
There are days when the sky is grey and it’s cold. We leave our warm homes and head for the office. On these bleak days staying home can be isolating. At work you could be having conversations with very interesting people like yourself.
Continuing to work to say age 70 or 75 will inevitably become the norm for those who can. You need to plan how to manage this especially if you are currently an employee.
The benefits of working later into your retirement years are:
Your work will seem much easier. This is because you have spent 30-45 years learning to ultimately become a master – with those finely honed skills you are now an authority. You can delegate the more boring parts of your work to younger people while you work on the things that have the greatest interest to you. You will take pleasure training younger people to become competent.
You will continue to have meaningful conversations with your colleagues and business associates. This makes life seem worthwhile.
You will have fewer years in retirement so you won’t need to have saved as much. This means you’ll be able to spend more on your annual 3 month holiday programme.
If you or your spouse needs to enter a rest home you will have a greater likelihood of being able to pay the rest home fees without decimating your accumulated wealth.
Save as much as you can for as long as you can.
Plan to be self employed so that you can work another 5-10 years after you have reached the official retirement age of 65.
Review your retirement savings programme every year with your investment adviser. Maybe you can retire earlier than you thought you could if this is what you want.