How Retirement Pensions Are Received Gains Importance... Spotlight on Insurers' Role in Pension Planning

Fidelity Combines Lifetime Annuity With TDF
Annuitization Addresses Risks of Direct Withdrawals
"Customized Plans Needed to Suit Each Subscriber's Situation"

As the importance of post-retirement income planning grows in the retirement pension market, the role of the insurance industry is coming into the spotlight. Analysts point out that if demand expands for converting retirement pensions into lifelong income beyond simple fund management, life insurers' expertise in longevity risk management and pension benefit design could emerge as key competitive advantages.

As aging and the retirement of the baby boomer generation become more prominent, interest in the retirement pension market is expanding beyond fund management to include income planning after retirement. Pixabay

According to the financial sector on June 27, U.S. asset management firm Fidelity Investments recently announced plans to launch 'Fidelity Freedom Lifetime,' a product with a built-in lifetime income option. This product combines Fidelity's Target Date Fund (TDF) investment strategy with lifetime annuity features from major U.S. insurers Nationwide and New York Life, enabling employees to convert part of their TDF balance within retirement pension accounts into annuity income that will be paid out from retirement until death. Fidelity plans to offer this product to its corporate customers using its retirement pension platform in early 2027.

A TDF is a product that automatically adjusts the ratio of stocks and bonds according to an investor's expected retirement date. When retirement is far off, the allocation to risk assets such as stocks is higher, and as retirement approaches, the share of safe assets such as bonds increases. While traditional TDFs have focused on asset accumulation before retirement, Fidelity's new product stands out by adding an insurer's lifetime annuity function to ensure a steady income after retirement. If retirees withdraw their savings directly, they may be exposed to longevity risk and market downturns, but by annuitizing a portion, they can secure a stable cash flow.

Interest in similar product structures is also growing domestically. Although the use of TDFs among retirement pension subscribers has increased recently, there is a lack of 'hybrid-type' products that convert accumulated funds into lifetime income after retirement. If the structure of managing assets through TDFs before retirement and converting part of the accumulated funds into a lifetime annuity after retirement becomes more widespread, the role of insurers is likely to grow. An insurance industry representative said, "As the retirement pension market expands, it is becoming important not only to manage accumulated funds, but also to design how benefits will be paid out after retirement. Lifetime annuities are closely linked to insurers' unique expertise in managing longevity risk."

Tax incentives for annuitization are also being strengthened. If a retirement benefit is received in the form of an annuity rather than a lump sum, retirement income tax can be reduced depending on the payout period. In particular, starting this year, a flat 3% tax rate is applied to lifetime annuity income regardless of age. This can be seen as a mechanism to encourage lifetime annuity receipt rather than payouts for a limited period.

However, there are also analyses suggesting that lifetime annuities may have lower initial payouts than fixed-period or flexible withdrawal types, and may lack flexibility when it comes to withdrawing lump sums or inheritance after the annuity begins. Seokyoung Kim, Senior Research Fellow at the Korea Insurance Research Institute, said, "If there are no particular health issues or family history, it may be reasonable to set the pension payment period for a certain duration or until a specific age. There is a need to develop various pension payment methods to appropriately meet the cash needs of pension recipients," he added.

This content was produced with the assistance of AI translation services.