Evaluating whether a lifetime product is right for you.
A key plank of the Federal Budget 2018 was the introduction of a ‘retirement income covenant’ requiring super funds to help members achieve retirement income objectives. Trustees must offer a Comprehensive Income Product for Retirement (CIPR) that provides income for life – a major boost to providers of such products as lifetime annuities.
But what is an annuity?
In its most basic form, an annuity is a promise to provide a series of regular payments in return for a lump-sum investment.
Annuities have been around for a very long time. They go back as far as the Roman Empire when a judge produced the ?rst known mortality table.
But while annuities have been a successful way of securing a regular payment in retirement across the world, it is only in more recent times that annuities in Australia have evolved to suit our unique retirement needs.
With the increase in demand for annuities in Australia, the types of annuities to suit speci?c requirements have also increased.
Types of annuities available from Challenger
Term annuities provide regular and guaranteed payments for a term chosen by the purchaser. The minimum term is one year and the maximum term is 50 years. Annuity payments are for the duration of the term and stop at the end of the term.
Lifetime annuities provide regular payments for the rest of the purchaser’s life. If you choose, the payments may continue for the lifetime of a second person, such as your partner, after you pass away. Lifetime annuities can help alleviate the worry that you will outlive your retirement savings.
Deferred lifetime annuities
This is a lifetime annuity where the payments do not start immediately. For example, the product might be purchased at age 65 with payments commencing at, say, age 85 and continuing for life.
Benefits of annuities
As well as the certainty of a regular income, there are other benefits in purchasing an annuity. These include:
• they are not affected by the swings in share markets
• they are tax-free if bought with superannuation funds after the age of 60, and if
• you have control over estate planning outcomes via the nomination of beneficiaries.
Annuities can offer a way to help ensure that you don’t outlive your savings, allowing you to ‘layer’ your retirement income, with a fixed term or lifetime annuity on top of the Age Pension. These layers combine to offer an income stream to ensure essential household expenses can always be covered. You then have more flexibility in terms of your other savings – whether you invest them for growth or use them to enjoy your retirement.
Is an annuity right for you?
If you are the sort of person who would value the security of a guaranteed regular income for a certain period of your life or for the rest of your life, then an annuity could be suitable for you. In all cases, it is important to consult with a ?nancial adviser to determine whether an annuity is right for you.
The story of Josh and Deb
Josh and Deb have been looking forward to their retirement for many years. Now they’ve both turned 67 and retired, they’ve calculated how much they think they will need to spend each year.
They have combined savings of $500,000 in superannuation and $50,000 in cash. Their essential annual expenses are about $42,000 and their target annual income is $60,000.
Occasional travel, socialising with friends and eating out more often are just a few of the freedoms Josh and Deb have been hoping for in their retirement.
However, they’re aware the bills still need to be paid and they don’t want to have to worry about these during their valuable years in retirement.
After speaking to their financial adviser, he recommends supplementing their Age Pension (from which they receive $20,792 in the first year of retirement) by investing $75,000 each of their savings into guaranteed lifetime annuities, providing them with a secure income of $8202 per year (indexed each year to rise with inflation) for the rest of their lives.
Knowing they have the security of this combination for the rest of their lives, even if all their other assets run out, gives Josh and Deb the freedom to invest $350,000 of their savings into a range of investments via account-based pensions. They will draw the first year’s payment of $29,006 from these pensions, giving them flexibility and liquidity.
Including the income earned on the money they have in the bank, Josh and Deb’s total income received in the first year of their retirement is $60,000. They have achieved the target annual retirement income they are looking for.
Please note: The case study relates to a hypothetical couple and is provided for illustrative purposes only. This case study is not intended to reflect any particular person’s circumstances. Centrelink rates and thresholds are as at 20 March 2018. Challenger Guaranteed Annuity (Liquid Lifetime) is based on a quote as at 20 March 2018, purchased with superannuation money, using the Flexible Income option with standard death benefit, maximum withdrawal periods and monthly payments which are indexed annually with inflation providing a first-year payment of $4208 to Josh and $3994 for Deb.
All content provided by YourLifeChoices is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.