Annuities

What exactly is an annuity, why have they not been popular in Australia, and why are annuities now becoming more popular?

What is an Annuity?

An annuity is a financial product which gives a guaranteed income for a number of years. Essentially, you give a product provider money, and they in turn provide a guaranteed payment for a period of time.

With an account-based pension, which is the most common superannuation structure for retirees, the retiree faces the risk of poor performance; with annuities it is the product provider which faces the risk. Because of this, the product provider largely invest the funds in defensive investments like bonds and cash, and this in turn dictates what rate of return they are prepared to offer consumers.  

Obviously, when the cash rates were extremely low, the return an annuity provider was offering consumers was also low. Now cash rates have risen sharply, the annuity returns are much more attractive.

What are the different Types of Annuities?

There are a growing number of product providers, and each product provider offers various iterations of annuities. This is one of the reasons why you should speak with an independent financial planner when considering annuities – someone with no ties to product providers, and someone who is solely interested in your best interests. 

Generally though you can get:

Lifetime Annuities

These provide a guaranteed regular income for your lifetime regardless of how investment markets perform or how long you live. If opted for, the payment amounts can be indexed to CPI, the RBA cash rate or even the share-market performance. 

Fixed Term Annuities

These provide secure monthly payment5s over the investment term as well as the payment of an agreed upon lump sum at maturity.

What are the Benefits of Annuities?

Peace of mind

Peace of mind would have to be the main benefit. Imagine investing $100,000 and being certain of receiving a known amount back every year that you are alive. And this can even be indexed to inflation.

When someone retires, they are exposed to risks such as longevity risk (how long will you live for?), inflation risk (what will it be, and how much more income do you need to maintain the same purchasing power?) and investment risk (what will your return be?).

Annuities can take away these risks.

Centrelink

A few years ago there were some significant changes to the way Lifetime annuities are assessed by Centrelink. It means that some people already receiving part-Centrelink aged pension payments can increase the amount they receive, and those not yet receiving any aged pension payments , but are close to the thresholds, could now receive some. 

The main Centrelink age pension benefit stems from only 60% of the annuity purchase price being considered an asset under the Centrelink asset test. This can even drop to 30%

What are some negatives of annuities?

There are some negatives with annuities , and it is important for consumers to be aware of them.

Bequests

A lifetime annuity is designed to provide you with an income till your death. Often, at your death the contract ends and there is no residual amount to pass onto your estate/beneficiaries. It is possible to structure annuities so that your spouse receives payments after your death, but ultimately the same result will occur – the contract would end at your spouse’s death and there will be no funds to be distributed as per their will.

Liquidity

An annuity is not an account based pension where you can make ad-hoc withdrawals and/or change your pension payment amount. It has contractually agreed payments, and whilst there can be some wriggle room, it is best to see the product for what it is – agreed payments for an agreed period of time.

Annuities most definitely should be something retirees are aware of. For some people they are clearly unsuitable, and for others they are can be an ideal solution for their retirement planning.

At Cornish Wealth Management we believe that advice on annuities is ideally suited for our one-off financial advice offering. You can either come in for a general advice chat to find out more factual information about annuities, or receive personal financial advice on whether they are suitable for you, and if so which product, which features and how much should be invested.