If you don’t qualify for the Age Pension, there’s an often overlooked strategy that may change that. This ‘trick’ could even help you if you are already receiving the Age Pension as it may increase your payment.
The ‘trick’ is a lifetime annuity. YourLifeChoices has previously flagged a push towards annuities, and there are some very good reasons to investigate the option.
Age Pension assets and income tests are where an advantage can be gained. Under the assets test, only 60 per cent of the purchase price of an annuity is counted. Further, if you live beyond the life expectancy of a 65-year-old male (currently age 84), then the amount that is asset-tested reduces to just 30 per cent of the purchase price.
As for the income test, it is similarly straightforward – only 60 per cent of income is counted.
Before diving headlong into the purchase of an annuity, there are several aspects and potential pitfalls to consider. First, the annuity you purchase must meet certain legislative requirements to be eligible for the Age Pension advantages.
Second, with lifetime annuities, your funds are generally tied up and you cannot access them beyond the agreed regular interval payments. This might make some investors uncomfortable. For those, a partial investment in annuities may be the best course of action. A combination of annuities and an account-based pension or other non-super funds could be one option. But professional financial advice is a must.
In broad terms, an annuity provides regular income for a fixed investment term that you choose in return for a lump sum investment.
To be a ‘complying’ annuity, the product must meet strict criteria set out by the federal government. The criteria are quite complex, but are offered by companies such as Challenger and AMP’s hybrid offering.
If you’re thinking that an annuity sounds very much like an account-based pension, you’re right – but only to a degree.
An account-based pension provides a regular income stream, just as an annuity does, from your super savings. To have an account-based pension, you must have reached your preservation age or met a condition of release for your super.
With an account-based pension, savings are invested in a range of asset classes, for example shares and bonds. This certainly provides potential for growth and higher investment returns, but it comes with risks, the biggest being that your savings might run out before you die.
Annuities, however, are not affected by the performance of investment markets. You are guaranteed to receive regular payments throughout the life of your annuity.
As mentioned, annuities provide no flexibility in terms of varying the amount received at intervals. Account-based pensions, on the other hand, do allow you to vary your payments at any time – as long as they meet the required annual minimum percentage withdrawal – and to make a partial lump sum withdrawal.
Annuities might well be a gateway to qualifying for, or increasing, your Age Pension, but, given the complexities involved, discussing the options with a financial adviser is highly recommended.
Have you investigated annuities? Does the 60 per cent rule make them extra appealing? Share your thoughts in the comments section below.
Also read:How not to fall foul of this Centrelink rule
Disclaimer: All content on YourLifeChoices website 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.