Securing an adequate and sustainable income is the savings goal of most Australians when planning and entering their retirement.
Central to most individuals’ retirement plans is the Government-provided Age Pension. Depending on the level of assets held and income received, this could provide an annual income of up to $23,095* for a single or $34,819* for a couple. However, for many households this isn't always enough to cover basic living costs, let alone to enable them to lead a truly comfortable and dignified retirement. Private savings may go some way to make up the shortfall, but it’s the amount held in super and how it’s invested post-retirement that is likely to make the difference between a successful retirement and one spent watching every cent.
While there are several options available to those looking to invest their accumulated superannuation funds, the key is to make your money last for as long as possible. This was identified in YourLifeChoices recent Retirement Living Survey (2017) as the number one concern for the majority of our members. By offering retirees the reassurance of an income stream that doesn't run out, and won’t fall, annuities are becoming increasingly popular.
With the correct investment advice, an annuity can be used to effectively complement the Age Pension and other types of income-producing assets. Because payments from an annuity are guaranteed, they can be a source of income on top of the Age Pension to make sure your essential costs are covered. As noted by the head of the Federal Government’s 2010 Superannuation System Review and Challenger Limited, Chairman, Retirement Income, Jeremy Cooper, “Annuities provide a guaranteed, regular pay cheque in retirement, free from uncertainty. They give you the ability to lock in an amount that covers your needs, leaving you to maximise the rest of your retirement portfolio with other investments. It’s not an ‘either/or’ conversation. Annuities work really well as the base layer of income alongside the Age Pension and other market linked investments that have the potential to grow but carry risk.”
How do annuities work?
Although there are different types of annuities on offer, the two main types are lifetime and fixed term annuities. So, how do annuities work and what’s the difference between a lifetime and fixed term annuity?
Basically, an annuity is an investment that delivers a secure, regular payment over a known period in return for an upfront investment, which can be as little as $10,000. You can choose whether to receive this regular payment on a monthly, quarterly, six monthly or annual basis and although these payments are generally fixed, they can be indexed partially, or fully, in line with inflation, or at a fixed rate, depending on the type of annuity.
What is a lifetime annuity?
As the name suggests, a lifetime annuity provides secure, regular income for the rest of your life or the life of a second person, such as your spouse.
In the past, if you put your money into a lifetime annuity, it would be locked away and you wouldn’t be able to access it. But today’s lifetime annuities are more flexible and offer greater options for accessing your money if you need it.
Within a lifetime annuity, you can choose the level of capital you have access to, the level of indexation and the frequency of payments, and to maintain control of your estate outcomes.
You have different options you can select within the annuity, and a financial adviser can help you figure out what best suits your own situation.
What is a fixed term annuity?
A fixed term annuity provides secure, regular income for a fixed term of your choice – which could be one year, or up to 50 years. With a fixed-term annuity, you can choose to have your initial capital investment returned to you at the end of the agreed term or as part of your regular payments throughout the investment period. Like the lifetime annuities, there are different options around indexing to keep up with inflation, payment frequencies, and leaving the annuity to someone when you pass away, so it’s best to go through all of these with a financial adviser before you invest.
As well as the certainty of a regular income, there are other benefits to purchasing an annuity, which 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
- you have control over estate planning outcomes via the nomination of beneficiaries.
In summary, annuities can offer a way to 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, which combine to offer an income stream to ensure essential household expenses can always be covered. With the essentials 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.
*Figures are for a full Age Pension, including supplements and are correct as at 17 May 2017.
As each person’s circumstances differ, this information should be considered as general in nature and not taken as advice. To ensure that you have the investment and income strategy that is right for you, you should discuss your circumstances with a qualified financial planner.
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