Saving for retirement can be a daunting task for many clients.
Thankfully, the Federal Budget announcements in May did not put an end to the popular transition to retirement (TTR) strategy as feared.
However, for the TTR strategy to be successful in maximising their retirement benefit, the client must continue to work throughout the duration of the strategy.
The TTR strategy, to be effective, usually needs to be applied for a minimum of 12 months.
However, the benefit is normally greater over a longer period — for example, commencing the strategy at age 55 and continuing to age 60 or 65.
With such a reliance on the continuation of employment over a set period of time to meet the client’s retirement goals, you need to ask yourself: How will sickness or injury impact your client’s TTR strategy?
For example, what happens if your client is unable to work for 12 months during a five-year TTR strategy recommendation? Will this be the end of the strategy? Will the client need to reassess their retirement goals and objectives? How can you help keep the TTR strategy on track? And how can you minimise the impact on the strategy?
More importantly, you need to ask: In what part of the TTR strategy recommendation in your statement of advice did you address the risk of injury or illness impacting the strategy?
When providing retirement strategy advice, many advisers fail to address or focus on, for one reason or another, the protection of such strategies. Therefore, when providing retirement strategy advice you should consider providing insurance advice to help protect the TTR strategy in the event that the client is unable to work because of injury or illness.
An important consideration here is that the TTR strategy can also incorporate the funding of such insurance protection, which in turn will protect the TTR strategy — providing a complete solution for the client.
There are a number of options for ownership of insurance policies, such as individual ownership, group (employer) ownership, company or trust ownership and superannuation ownership.
Each of these different ownership options provides a benefit for the life insured. However, there are many differences that need to be considered when determining the best ownership for protecting a TTR strategy. These include the terms and conditions as well as the features and benefits of the policy, underwriting, cost of premiums, funding of premiums, direction of benefit at claim and tax.
Irrespective of the ownership option, one of the main factors affecting income protection is the cost or the perceived cost.
The factors that will impact on the cost of an income protection policy are:
- age — the older you are, the more expensive the premium;
- gender — normally premiums for women are more expensive than for men;
- occupation — blue collar occupations (eg, electrician, carpenter) are normally more expensive than white collar occupations (eg, accountant, computer programmer);
- income — the greater the income, the higher the premium;
- pastimes — if a person engages in high-risk activities (sky diving, hang gliding, and so on), then the premium will be higher;
- health and pre-existing conditions — the less healthy a person is when they apply for cover, the higher the premium; and
- smoking status — a person who is a smoker will pay 30 to 100 per cent more for their premium.
While TTR strategies are normally associated with employees, the self-employed can also benefit from a TTR pension even though they are unable to salary sacrifice their income.
The use of deductible contributions into superannuation can provide the same benefit, making the strategy just as beneficial for the self-employed. However, an important consideration, which applies to both employees and the self-employed, must be made in regards to the concessional contribution cap — currently $50,000 until 2012.
Case study
Let’s look at a case study to demonstrate the importance of protecting the transition to retirement strategy.
David is aged 55 earning $60,000 per annum. He has $300,000 in superannuation and wants to maximise his retirement benefit over the next five years before retiring while maintaining his take-home pay.
The results of the transition to retirement strategy over a five-year period compared to no TTR strategy are highlighted in Table 1, with David improving his retirement benefit by $27,379 over five years.
At age 58, David is in a major car accident, which requires months of hospitalisation and rehabilitation. This was not a work-related accident so no workers’ compensation is payable.
David has 30 days’ sick leave and annual leave available and no other insurances.
As David has not met a condition of release, he is unable to access super at this stage and his only income is from the TTR pension (which is currently at the 10 per cent maximum).
How will this accident affect David’s TTR strategy? Table 2 highlights the impact if David was unable to work for a full 12 months, in year three of the five-year strategy.
As a result of his accident, David will be almost $40,000 behind his retirement goal. What would David’s position be if he had income protection insurance?
One of the main arguments for not incorporating income protection as part of the TTR strategy is the cost and the reduction of the TTR strategy benefit because of the income protection premiums. However, as Table 3 demonstrates, paying these premiums with a TTR strategy still provides a benefit.
As you can see from Table 3, the inclusion of income protection premiums has not significantly impacted on the TTR benefit. The difference is $5,732 to the TTR benefit after five years. This difference represents protection to the TTR strategy.
Table 4 shows how the income protection policy preserves David’s TTR strategy after his car accident.
Finally the graph summarises the three positions that the client could face:
- suffering no accident and disruption to working pattern;
- suffering accident with no income protection; and
- suffering accident with income protection.
While we cannot guarantee no disruption to David’s work after the accident, what we do have influence over is the protection of his assets, including his ability to earn an income.
In summary, the focus, and rightly so, for many retirement specialists is the actual benefit their client receives throughout their retirement.
However, to achieve this it is therefore critical that advice is provided to protect this benefit as well as the advice to accumulate it.
<br Dante De Gori is technical manager, business support at ClearView Retirement Solutions & MBF Life.
