Written by Kris Wrenn
My Hudson clients will have heard me talking a lot about Cash recently and how it has finally become “an investment” again after many years of it just being a “safe haven”, with almost no return to speak of. It could arguably be said that Annuities are in a very similar boat. The returns on offer are increasing but the range of options available are also more diversified, with some Centrelink friendly offerings available as well. In this article, I will look at various annuity products available today and also challenge some very common assumptions about annuities.
There are many out there that disregard annuities on the basis that the returns are generally quite poor. During recent times, with interest rates as low as they were, I can excuse people for thinking such a thing, but times have changed in a very short space of time. In fact we have now seen a dozen interest rate rises, that is, a rise every time the RBA have met since May last year, barring the meet in April this year. Furthermore 4 of the 12 rate hikes were a 0.5% increase.
Hudson currently has access to short-term annuities around 5.3% – 5.4%, potentially more by negotiation based on the amount invested.
Likewise, lifetime annuities are also far more competitive in the current climate compared to a few years ago. As way of example, a male aged 65 can lock in over 5% p/a for life with full “inflation protection”.
But what if I die early you may ask? This is a very valid question because historically, lifetime annuities were often associated with the very real “risk” that once implemented, you die and your beneficiaries lose out on the original amount invested. These days, although not completely foolproof, there ARE ways to protect yourself/family from this risk. There are annuity products out there that have a “death benefit”. That is, if the investor does die within a specified amount of time, the beneficiaries actually get the entire original amount back. E.g. For someone retiring at age 67, the death benefit may be 9 or 10 years. Beyond that, you can then even have a structure where there is a partial return of the capital that reduces each year thereafter until becoming Nil.
Another common mistake people make about annuities is to think or assume that they need to put all their retirement assets into an annuity. One idea, and arguably one of the best ideas, is to start by calculating what guaranteed income you want and then work backward to determine how much you need to use to achieve it. You might look at your budget and calculate that you need $18,000 a year to meet all your basic needs; groceries, petrol, utilities etc. Depending on your retirement assets and the rates achievable at the time, you may find you only need 20% or 30% of your funds to achieve this and the remainder could be invested into something more aggressive with a longer-term focus.
Even if you do find that you need quite a large starting capital, you should know that companies that issue annuities are supervised by the Australian Prudential Regulation Authority (APRA) and are required to prove that they have enough capital now in order to make future payments to customers, so they have a safety edge over shares, corporate bonds and even term deposits in some cases.
Centrelink friendly à Lifetime Annuities (not term annuities) purchased after 1st July 2019 are not fully assessed by Centrelink under the assets and income tests.
- Under the Assets test only 60% of the purchase price is assessed under the assets test until age 84 and only 30% of it beyond age 84.
- Under the Income test only 60% of the income is assessed.
For those retirees that are eligible for a part pension therefore, an annuity can prove effective at increasing your entitlement.
Market linked à Another recent evolution of the annuity has been market linked annuities that can actually include share market exposure. The positive is of course that they can enjoy higher returns when the share market is doing well and they still “pay for life” like any lifetime annuity. The obvious negative is that the income level is not guaranteed and can fall when the markets are poor, so some might argue they go against the very idea of what an annuity is supposed to be.
If you wish to discuss annuities with your adviser, book in. Contact us on 1800 804 296.