Deferred lifetime annuities explained

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I have a hard time trying to explain the benefits of delayed gratification to my kids, so I’d hate to try and sell them the idea of a deferred lifetime annuity.

Hopefully, by the time they reach adulthood they will have a better grasp of the concept because there can be some serious advantages, especially for those willing to wait to access their retirement funds.

Lifetime annuities are becoming increasingly popular retirement options, providing regular payments for the rest of the purchaser’s life. You don’t, however, have to set up these annuities in such a way that they start paying from the moment you retire or the moment that you purchase them. It is possible to defer starting these payments, and there are significant advantages to doing so when it comes to the assessment for the Age Pension.

If you are still earning significant income in retirement, you may be denied a pension under the income test.

Exceeding the fortnightly income limit will see your pension reduced by 50 cents for every $1 over the limit, until you reach the disqualification limit for a part Age Pension, at which point your Age Pension payment will cease.

A deferred lifetime annuity is only assessed under the income test when it starts to make payments. There are no income test assessments before payments commence.

Once the payments start, 60 per cent of all payments from the deferred lifetime annuity will be assessed as income, which is the same for all lifetime annuities.

When it comes to the assets test, it is a bit different.

Deferred lifetime annuities are assessed under the assets test from the date of purchase.

Case study
A person purchases a deferred lifetime income stream at age 65 for $200,000. At the date of purchase the life expectancy of a 65-year-old male is 19 years. The income stream does not start making payment until they are 80 years old.

Under the income test, 60 per cent of the payments from the income stream are assessed as income. No income is assessed before they are 80 and start receiving payments.

Under the assets test, 60 per cent of the purchase amount ($120,000) is assessed as an asset from the date of purchase for 19 years, after which 30 per cent of the purchase amount ($60,000) is assessed as an asset for the duration of the annuity.

Do you have a deferred lifetime annuity? When are you set to start receiving payments? How did you decide on the right time to start receiving payments?

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Written by Ben


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