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Annuities

Annuities come in several different forms but the common thread is that you hand over a lump sum to the annuity provider and in return they guarantee to pay you an income. They can be purchased with ordinary money or superannuation money.

A Term Certain annuity lasts for a fixed term that you agree at the start.

A lifetime annuity lasts for, as the name suggests, your lifetime. If you are in excellent health and come from a long lived family then this is a much more attractive proposition for you than for someone in poor health whose parents passed away in their sixties.

Annuity rates are generally locked in at the start and can have inflation protection built in with the income increasing annually however this is offset by the initial income generally starting at a lower figure than a non indexed annuity.

Certain types of Annuity carry some preferential treatment under the income and asset test for the Age Pension and may be useful for increasing the Age Pension entitlements over time for some clients.

Common questions asked about annuities include “can I change my mind and cash it in? What happens to the balance when I die? How safe is my money?” Terms vary between providers and these specific questions should be answered in detail by your adviser or annuity provider prior to you making a decision to invest.

It is important to note that whilst annuities are advertised as a guaranteed income stream (stock market volatility does not impact regular payments) the guarantee is from the annuity provider, not from any Government body. The Australian Prudential Regulatory Authority  have strict requirements that annuity providers must comply with which include having adequate reserves to meet the income payments they are contracted to provide, however APRA do not guarantee the annuity provider’s performance of their obligations. It is therefore crucial that an investor or their adviser assess the financial strength of the provider when comparing payment rates from different companies.

A retiree investor does not have to make the choice of using only one type of income stream such as an annuity or an Account Based Pension, they can use either, both or none at all!

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