Annuities

How to turn your super into a guaranteed income for life.

Similar to an account-based pension, an annuity guarantees you a fixed income for a number of years, or even the rest of your life, depending on your financial circumstances and arrangement. Also known as a fixed-term pension, an annuity is less flexible than an account-based pension but can offer you reliability when it comes to your retirement income.

How Does it Work?

An annuity can be purchased either using funds from your superannuation or life insurance company, or with your own savings. When purchasing an annuity, you will have the ability to choose whether you would like the payments to be made for a fixed number of years, for your life expectancy, or for the rest of your life.

If you are purchasing an annuity with your super funds, you must have reached the preservation age (between 55 and 60, depending on when you were born). You must also meet a condition of release, such as permanently retiring, reaching the age of 65, or becoming totally and permanently disabled. If you choose to use your super for your annuity purchase, it can only be in your name.

You can buy an annuity in joint names, to allow income to be split for tax purposes. However, this can only be done using savings, and cannot be purchased with your super. If you or your partner die, the surviving partner will gain full ownership of, and access to, the funds.

Income

When you purchase your annuity, you will have to decide on the payment amount and frequency (monthly, quarterly, half-yearly or annually). You can also choose whether you would like your income to increase each year by a fixed amount or percentage, or indexed with inflation.

If you are buying your annuity with your super funds, you will be paid a certain percentage of the balance, based on your age. 

It’s also important to note that an annuity forms part of the income and assets test that is used to determine your eligibility for the Age Pension.

What Happens in the Event of Your Death?

When purchasing your annuity, you can opt to nominate a reversionary beneficiary or you can select a guaranteed period option:

Reversionary Beneficiary

In the event of your death, your nominated beneficiary (generally your spouse or a dependant) will receive your income payments for the rest of their life, however, this is normally at a reduced level. EG. 65% of your income stream.

Guaranteed Period

If you choose a guaranteed/minimum payment period, your beneficiary will continue to receive your payments either as a lump sum or income stream at the regular rate (not reduced).

Annuity vs Account-Based Pension

An annuity is one of the most stable retirement investment options, as unlike super or an account-based pension, your balance is not affected by share market performance. Conversely, an account-based pension provides returns based on investments made by your fund with your money on your behalf – this is generally a mix of shares, property and bonds. As such, you have the potential for better growth, but you also have to ride out fluctuating market waves, making it a riskier option than an annuity.

PROS

• Guaranteed income, set amount at regular intervals
• No investment risk due to market fluctuations
• Annuities purchased with super funds are tax-free from the age of 60
• Indexed annuity option affords protection from the rising cost of living/inflation
• Lifetime annuity ensures payments for as long as you live
• Option for your surviving spouse or dependant to continue receiving income after your death
• Option for money to be handed over to your estate in the event of your death with a fixed-term guarantee annuity

CONS

• No control over how your money is invested
• The amount you receive will be low if your annuity starts in a low interest rate period
• Once you start getting payments, you cannot change the amount you receive in income
• You cannot access your money during the annuity term 
• You cannot withdraw a lump sum from your annuity

Is an Annuity Right for Me?

Your ideal retirement plan will be dependent on many factors such as your age, job security, industry and personal circumstances. You may find that an annuity could play a part in your overall strategy, in conjunction with a number of other investment avenues. For an obligation-free consult on how to maximise your retirement nest egg, contact Super Network Services today.