Retirement is different January 2017 Considerations and opportunities

This information is current as at January 2017 unless otherwise specified and is provided by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 (Challenger), the issuer of the Challenger Annuities (Annuity). It is intended to be general information only and not financial product advice and has been prepared without taking into account any person’s objectives, financial situation or needs. Investors should, before making any investment decision, consider its appropriateness having regard to these matters and the information in the product disclosure statement (PDS) for the relevant Annuity before deciding whether to acquire or continue to hold an Annuity.  A copy of the PDS is available at www.challenger.com.au or by contacting our Investor Services Team on 13 35 66. Where examples, hypotheticals or case studies are used, they are used for illustrative purposes only.   They are not to be relied on and do not reflect any person’s particular objectives, financial situation or needs. This information may also include statements of opinion, forward looking statements, forecasts or predictions based on current expectations about future events and results. Any such statements are subject to change and actual results may be materially different from those shown. This is because outcomes reflect the assumptions made and may be affected by known or unknown risks and uncertainties that are not able to be presently identified.  The taxation, Centrelink and Department of Veterans’ Affairs (DVA)  information and illustrations are based on current law at the time of writing which may change at a future date.  Challenger is not licensed or authorised to provide tax, social security or DVA advice.  We strongly recommend that professional taxation, social security and/or DVA advice for individual circumstances be sought. Past performance is not a reliable indicator of future performance. In preparing this information, Challenger has relied on publicly available information and sources believed to be reliable, however the information has not been independently verified. While due care and attention has been exercised in the preparation of this information, no representation or warranty, either express or implied, is given as to the accuracy, completeness or reliability of that information. The information presented is not intended to be a complete statement or summary of the industries, markets, securities or developments referred to in the presentation.  Neither Challenger nor their related entities, nor any of their directors, employees or agents accept any liability for any loss or damage arising out of the use of all or part or, or any omission, inadequacy or inaccuracy in, the information presented.  Where a person acquires or holds an Annuity, Challenger and its related parties will receive the fees and/or other benefits disclosed in the relevant PDS. Neither Challenger, its related entities nor their employees receive any specific remuneration for any advice provided. Financial advisers, however, may receive fees or commission if they provide advice to you or arrange for you to invest in a Challenger Annuity. Some or all Challenger Group companies and their directors may benefit from fees, commissions and other benefits received by another Group company.

Agenda Retirement is different Key retirement considerations Longevity – the ‘how long’ of retirement Sequencing – the down and ups of markets matter Inflation – the ability to maintain spending power Managing changes for and in retirement Age Pension changes Super and income stream changes Reviews – integral to success

Retirement is different A time of change Retirement brings a host of challenges and uncertainties You will no longer be receiving a regular income from employment You may rely on a combination of superannuation, other investments and the Government Age Pension Lifestyle changes

Retirement is different What does your retirement look like?

Retirement is different What does your retirement look like? Sydney Morning Herald, Sydney 4 August 2015.

What is important to retirees National Seniors Australia Survey 1. Health Medium priority Low priority High priority 2. Longevity 3. Peace of mind 4. Inflation 5. Volatility 6. Accessibility Source: National Seniors Australia – Retirees’ Needs and Their (In)Tolerance for Risk – March 2013.

Retirement is different Success through careful consideration Managing some of the key risks in retirement is an important part of achieving a successful retirement Longevity Sequencing Inflation

Retirement is different Longevity

Retirement is different How long do you expect retirement will be? Australian Life Tables produced by the Australian Government Actuary.

Retirement is different Longevity a key retiree consideration Source: Challenger estimate from Australian Life Tables 2010-12 with 25 year mortality improvement factors from AGA.

Retirement is different Australian’s own expected life expectancy Age group Average estimation of own life expectancy Intergenerational Report Underestimation 50 to 54 81.4 88.5 -7.1 55 to 59 82.8 88.2 -5.4 60 to 64 83.5 88 -4.5 65 to 69 84 -4 70 to 74 85.4 88.3 -2.9 75 to 79 86.9 88.9 -2 http://nationalseniors.com.au/sites/default/files/140708_NationalSeniorsAustralia_Challenger_RetirementPlanning.pdf Source: National Seniors Australia, How realistic are senior Australian’s retirement plans July 2014.

Retirement is different Investments

Retirement is different The addition of returns TRUE or FALSE? Initial investment of $100,000… -5% return in year 1 and then +5% in year 2 Investment after 2 years is $100,000

Retirement is different The addition of returns TRUE or FALSE? Initial investment of $100,000… -5% return in year 1 and then +5% in year 2 Investment after 2 years is $100,000 FALSE $100,000 after -5% return = $95,000 $95,000 after +5% return = $99,750 In fact, on $95,000 a 5.263% was required to be equal!

Retirement is different Order of returns Initial investment of $100,000…no withdrawals -5% return in year 1 and then +5% in year 2 equals $99,750 at the end of year 2 Would the answer be the same if the returns were reversed? YES or No

Retirement is different Order of returns Initial investment of $100,000…no withdrawals -5% return in year 1 and then +5% in year 2 equals $99,750 at the end of year 2 Would the answer be the same if the returns were reversed? YES or No

Retirement is different Sequence in retirement Initial investment of $100,000…$5,000 p.a. withdrawals1… -5% return in year 1 and then +5% in year 2 equals $90,006 at the end of year 2 Would the answer be the same if the returns were reversed? YES or No? Assumes withdrawals are made regularly during the year

Retirement is different Sequence in retirement Initial investment of $100,000…$5,000 p.a. withdrawals1… +5% return in year 1 and then -5% in year 2 equals $90,006 at the end of year 2 Would the answer be the same if the returns were reversed? YES or No $100,000 after -5% return = $90,125 $90,125 after +5% return = $89,506 Assumes withdrawals are made regularly during the year

Retirement is different Sequencing risk – Order does matter in retirement Source: Challenger estimates using ABS, S&P/ASX accumulation with UBS and Commonwealth bank bond indices . Assumes retiree draws ASFA comfortable standard of living $42,254 indexed to CPI each year.

Retirement is different Inflation Assumes annual inflation of 2.5%

Retirement is different Maintaining your purchasing power

Retirement is different The government safety net

Managing changes in and for retirement Importance of reviewing your retirement strategies Age Pension impacted by Assets Test changes (1 Jan 17) $1.6m “transfer balance cap” to tax-free super pensions (1 Jul 17) Age Pension age increases (1 Jul 17) Earnings of TTR pensions subject to super accumulation rate tax (1 Jul 17) Super contribution rules changed (1 Jul 17) Enhanced retirement income streams available (1 Jul 17)

Managing changes for and in retirement Age Pension changes

1 January 2017 Assets Test changes Assets Test thresholds Assets Test thresholds above which Age Pension entitlements start to reduce Thresholds before 1 January 20171 Thresholds from 1 January 2017 Change Single, homeowner $209,000 $250,000 $41,000 Single, non-homeowner $360,500 $450,000 $89,500 Couple, homeowner $296,500 $375,000 $78,500 Couple, non-homeowner $448,000 $575,000 $127,000 1 Thresholds as at 20 September 2016

1 January 2017 Assets Test changes Assets Test taper rate Assets Test taper rate increased from $1.50 p.f. per $1,000 to $3.00 p.f. per $1,000 above the Assets Test thresholds on 1 January 2017 Assets Test upper thresholds reduced (above which the Age Pension is not payable) Upper thresholds before 1 January 20171 Upper thresholds from 1 January 2017 Single, homeowner $793,750 $542,500 Single, non-homeowner $945,250 $742,500 Couple, homeowner $1,178,500 $816,000 Couple, non-homeowner $1,330,000 $1,016,000 1 Thresholds as at 20 September 2016

1 January 2017 Assets Test changes Measuring the impact (single, homeowner) Assessable assets Age Pension prior to 1 January 2017 Age Pension on 1 January 2017 Reduction in Age Pension $100,000 $22,805 $0 $200,000 $22,056 $300,000 $19,256 $18,905 $351 $400,000 $15,356 $11,105 $4,251 $500,000 $11,456 $3,305 $8,151 $542,500 $9,798 $600,000 $7,556 $700,000 $3,656 $800,000 Assumes all assets are financial assets and asset values are the same before and after 1 January 2017. Age pension prior to 1 January 2017 based on rates and thresholds as at 20 September 2016.

1 January 2017 Assets Test changes Measuring the impact (couple, homeowner) Assessable assets Age Pension prior to 1 January 2017 Age Pension on 1 January 2017 Reduction in Age Pension $200,000 $34,382 $0 $300,000 $33,915 $400,000 $30,346 $32,290 ($1,944) $500,000 $26,446 $24,632 $1,814 $600,000 $22,546 $16,832 $5,714 $700,000 $18,646 $9,032 $9,614 $800,000 $14,746 $1,924 $12,822 $816,000 $14,122 $900,000 $10,846 $1,000,000 $6,946 $1,100,000 $3,046 $1,200,000 Assumes all assets are financial assets and asset values are the same before and after 1 January 2017. Age pension prior to 1 January 2017 based on rates and thresholds as at 20 September 2016.

1 January 2017 Assets Test changes Impact on concession cards Those who lose their Age Pension completely will lose their Pensioner Concession Card but will be automatically entitled to a Commonwealth Senior’s Health Card and Low Income Health Care Card Indefinitely exempt from the usual income test requirements Provide some, but not all, of the benefits of the PCC www.dhs.vic.gov.au/concessions provides benefit comparison

1 January 2017 Assets Test changes Strategic opportunities Appropriate valuation of non-financial assets Improvements to the family home Spending Gifting Funeral bond / prepaid funeral expenses Super for a spouse less than Age Pension age Lifetime annuity

Simon and Susan Case study using a lifetime annuity Simon and Susan (aged 65) are a couple and own their home They have $300,000 each in account-based pensions (commenced in July 2015) They have $30,000 in cash/term deposits and $20,000 in personal assets Their investor risk profile is 50% defensive and 50% growth They have a target income (from all sources) of $60,000 p.a. (around the ASFA “comfortable” retirement standard) Age Pension is currently $12,9321 per annum They are considering alternatives to help them maintain their current lifestyle in retirement Based on Centrelink rates and thresholds as at 1 January 2017

Simon and Susan Reducing value under the Assets Test Simon and Susan’s adviser has recommended considering a partial allocation to lifetime annuities1 with 25% of their Account Based Pension assets ($75,000 each) Simon’s life expectancy is 19.22 Susan’s life expectancy is 22.05 $75,000 / 19.22 = $3,902 $75,000 / 22.05 = $3,401 1Challenger Liquid Lifetime Annuity (Regular Income Option) featuring guaranteed income payments for life, 15 year guaranteed death benefit and 15th year 75% guaranteed withdrawal value. PDS available from www.challenger.com.au. Clients should seek appropriate financial advice.

Simon and Susan Blend the annuity with existing investments Strategy Account-based pension $225,000 Lifetime annuity $ 75,000 Total $300,000 40%

Simon and Susan Achieving a strategic outcome . Source: Challenger Age Pension Calculator, 8 December 2016. Centrelink rates and thresholds as at 1 January 2016. Lifetime annuity includes nominal payments, regular income option and maximum withdrawal guarantee (75% after 15 years) and death benefit. Calculator and quotes available from challenger.com.au. ABP assets assumed to earn 5.70% p.a. (growth) and 3.15% p.a. (defensive) net of platform, investment and advice fees.

Managing changes for and in retirement Super and income stream changes

Super and income stream changes $1.6 million ‘transfer balance cap’ Effective 1 July 2017 $1.6 million1 cap on total amount of superannuation transferred to retirement phase Excess amount above the cap must be removed from retirement phase Where there is an excess amount above the cap, ‘excess transfer balance tax’ applies to notional earnings on that excess amount Transitional rules for existing income streams at 1 July 2017 Indexed in $100,000 increments on an annual basis in line with Consumer Price Index

Super and income stream changes Taxation of transition to retirement (TTR) Pension assets Effective 1 July 2017 Remove the tax exemption on earnings for TTR pension assets Earnings taxed at maximum of 15% Applies to all TTR pensions (existing and new) Option to roll TTR pension to an account based pension (with tax-free earnings) on meeting a condition of release Retirement, attaining age 65 etc

Super and income stream changes Concessional contributions Improved access to concessional contributions “10% rule” removed from 1 July 2017 Deductible personal contributions for all $25,000 concessional contributions cap from 1 July 2017 Down from $30,000/35,000 per annum Catch-up concessional contributions from 1 July 2018 Five year unused carry-forward where super balance is < $500,000 Additional tax on concessional contributions for more higher income earners Additional 15% tax income threshold falls from $300,000 to $250,000 per annum from 1 July 2017

Super and income stream changes Non-concessional (after-tax) contributions Annual $100,000 non-concessional contributions cap from 1 July 2017 Only available where total super assets are < $1.6m 3-year draw forward rule continues (up to 3 x $100,000) Opportunity to use current cap (up to 3 x $180,000 before 1 July 2017)

Reviews Keeping on track to succeed

Retirement is different Keep things on track Personal changes Financial changes Future cash flow needs Retirement Vision ‘review and update’ Review investments for changes Adapted from GDC Research and Practical Perspectives, Serving retirement income clients: A best practices guide for advisors

Retirement is different Financial advice covers many areas

Any questions?