Annuities in New Zealand: Do They Have a Place in Your Plan?

Picture this: You're 65, you've just retired with $400,000 in KiwiSaver and savings, and you're staring at what could be 30 years of needing to make that money last. The thought keeps you up at night. What if the market crashes? What if you run out?

This is where annuities enter the conversation. An annuity is essentially a contract with an insurance company: you hand over a lump sum, and in return, they promise to pay you a regular income for life, or for a set period. It sounds appealing, especially if you crave certainty. But here's the thing, annuities in New Zealand aren't like they are in other countries. The market is thin, the options are limited, and the trade-offs are substantial.

Let's dig into what's actually available, how they work, and whether they deserve a place in your retirement plan.

An annuity is a financial product designed to convert a lump sum into a stream of income. You pay a premium (your lump sum) to an insurance provider, and they commit to paying you regular amounts, monthly, quarterly, or annually.

There are two main types available in New Zealand:

• Lifetime annuities: Payments continue for as long as you live, no matter how long that is. This provides protection against longevity risk (outliving your money).
• Term certain annuities: Payments are made for a fixed period (say, 10 or 20 years), regardless of whether you're alive. If you die early, payments continue to your estate or beneficiaries.

Some annuities offer additional features like inflation adjustments or joint-life coverage (payments continue for a surviving spouse). But each feature reduces your initial payment amount, sometimes significantly.

Here's the honest reality: the annuity market in New Zealand is not robust. Unlike countries like the UK or Australia, where annuities are common retirement tools, Kiwis have historically relied on NZ Super as their base guaranteed income, supplemented by KiwiSaver and personal savings.

Only a handful of providers offer annuities here, including Lifetime Income (previously Lifetime Retirement Income), Fidelity Life, and a few others. This limited competition means you won't find the variety or competitive pricing you might see overseas.

Why the small market? Several factors contribute:

• NZ Super: Our universal pension already provides a baseline guaranteed income (around $471 per week after tax for a single person living alone in 2024), reducing the perceived need for private annuities.
• Cultural preferences: Many New Zealanders prefer flexibility and control over their money, especially for estate planning purposes.
• Low interest rates: For years, low rates made annuity payouts unattractive. While rates have risen recently, they've also made other investments more appealing.

The result? Annuities remain a niche product, used by a small percentage of retirees.

Guaranteed income sounds wonderful, but it comes with costs that go beyond the premium you pay. Understanding these trade-offs is crucial before committing a large portion of your savings.

1. Loss of Capital Access

Once you purchase a traditional lifetime annuity, that money is gone. You can't access it for emergencies, opportunities, or changed circumstances. If you need $50,000 for unexpected medical expenses three years into retirement, tough luck, that capital is locked away.

Some newer products offer partial withdrawal options, but these typically come with penalties or reduced future payments.

2. Inflation Erosion

Most standard annuities pay a fixed amount. If you lock in $2,000 per month today, you'll still receive $2,000 per month in 15 years, when inflation has potentially halved its purchasing power.

You can purchase inflation-adjusted annuities (often linked to CPI), but the initial payment will be substantially lower, sometimes 30-40% less than a fixed annuity. That's a significant reduction in your immediate income.

3. Opportunity Cost

Money in an annuity isn't growing through investment returns. While the market has delivered average annual returns of 7-9% over long periods (with volatility), your annuity payment is essentially based on conservative bond-like returns plus the insurance company's profit margin.

If markets perform well over your retirement, you might have been financially better off with a diversified investment portfolio and systematic withdrawals.

4. Estate Planning Limitations

With a standard lifetime annuity, if you die earlier than expected, there's nothing left for your family or causes you care about. That $300,000 you invested? The insurance company keeps whatever's left.

Term certain and joint-life options address this, but again, they reduce your payment rates.

5. Provider Risk

You're trusting that the insurance company will be around and financially healthy for the next 20-30 years. While New Zealand insurers are regulated by the Reserve Bank and generally stable, this is still a concentration of risk in a single institution.

Despite the limitations, annuities aren't inherently bad. They serve a specific purpose and can be valuable in the right circumstances.

Annuities may be worth considering if:

• You have no other guaranteed income sources: If you're not eligible for NZ Super or have minimal guaranteed income, an annuity can provide stability.
• You have genuine longevity risk: Strong family history of living into your 90s or beyond? An annuity provides insurance against outliving your money.
• Market volatility causes you severe anxiety: If watching your portfolio fluctuate keeps you from sleeping or causes you to make poor emotional decisions, the psychological value of guaranteed income might outweigh the financial trade-offs.
• You want to simplify one portion of your income: Some retirees use annuities to cover fixed expenses (rates, insurance, utilities) while keeping other investments flexible for discretionary spending.
• You're concerned about cognitive decline: Annuities require no ongoing management decisions, which can be valuable if you're worried about your ability to manage investments in later years.

The key insight? Annuities typically work best as part of a diversified retirement income strategy, not as your sole solution. Think of them as one tool in your toolbox, not the entire workshop.

Before committing to an annuity, explore these alternatives that might offer better flexibility:

Diversified Investment Portfolio with Systematic Withdrawals

This is the approach most Kiwi retirees take. Keep your money invested in a diversified portfolio (through KiwiSaver or other investment accounts) and withdraw a sustainable percentage each year. The bucket strategy is one popular framework for managing this approach.

Historical research suggests withdrawal rates of 3.5-4% annually from a balanced portfolio have high success rates over 30-year retirements, though this isn't guaranteed.

Combining NZ Super with Flexible Investments

NZ Super already provides a foundation of guaranteed income. Many retirees find they can cover essential expenses with NZ Super plus modest withdrawals from savings, keeping the bulk of their capital invested and accessible.

Deferred Annuities

Some newer products allow you to purchase an annuity today that doesn't start paying until you're 80 or 85. This is cheaper than an immediate annuity and provides insurance for your later years while keeping your capital flexible in early retirement. However, availability in New Zealand is limited.

Bond Ladders

For those seeking fixed income without surrendering capital, you can build a ladder of government or high-quality corporate bonds with staggered maturity dates. This provides predictable income while eventually returning your principal, though it requires more active management.

If you're seriously considering an annuity, these are important questions to work through, ideally with a licensed Financial Advice Provider:

• What percentage of your total retirement savings would this annuity represent? (Generally, financial planners suggest no more than 25-30% of total assets)
• How much guaranteed income do you already have from NZ Super?
• What are your fixed, non-negotiable expenses? Could NZ Super plus flexible withdrawals cover these?
• How important is leaving a financial legacy?
• What's your health status and family longevity history?
• Have you compared quotes from multiple providers?
• Do you understand all the fees, including any embedded commissions?
• What happens if your circumstances change dramatically?

These aren't rhetorical questions. Write down your answers. Share them with your partner. The decision to purchase an annuity is significant and largely irreversible.

Annuities in New Zealand occupy an interesting space. They offer something genuinely valuable - guaranteed lifetime income and protection against longevity risk. But they also require significant trade-offs in flexibility, inflation protection, estate planning, and potential returns.

For most Kiwi retirees, especially those with reasonable health, average life expectancy, and NZ Super eligibility, annuities don't make sense as a primary retirement income strategy. The combination of NZ Super plus flexible investments typically offers better overall outcomes.

However, for specific situations - severe market anxiety, exceptional longevity risk, desire to simplify income in later years - they can play a valuable supporting role. The key is thinking of them as insurance rather than investment, understanding exactly what you're paying for that guarantee.

If you're considering an annuity, take your time. Get multiple quotes. Model different scenarios. And most importantly, don't commit more than a modest portion of your retirement savings. Flexibility is valuable, and once you buy an annuity, that flexibility is gone.

This article is general information only and does not constitute personalised financial advice. For advice tailored to your situation, speak with a licensed Financial Advice Provider. You can find a registered adviser at fma.govt.nz.