Lifetime income products such as annuities are being presented as a way for Australian retirees to reduce the stress of volatile markets and secure a regular income for life. Advisers say they can provide greater certainty, but warn that buyers must weigh up tax, Centrelink, flexibility and estate-planning implications.
Moving from employment into retirement can raise concerns about how long savings will last and whether a previous standard of living can be maintained. Those uncertainties can affect people even when they have substantial superannuation balances or other assets.
An annuity is one type of lifetime income product. It can provide payments for the holder’s lifetime, although some products may instead be arranged for a fixed period, such as 10 years.
Natalie Scott, an SMSF manager at HLB Mann Judd, said fixed or CPI-linked annuities were not affected by investment market performance.
“Put simply, an annuity can be a way of achieving peace of mind,” she said. “With super, the performance of your portfolio can affect whether you’ll have enough money until you pass away. An annuity can solve that problem.”
How annuities affect tax and the Age Pension
The tax treatment depends on how the annuity is funded. Payments from an annuity bought with superannuation are tax-free for people aged 60 or over.
Those aged between 55 and 59 who use super to buy an annuity pay their marginal tax rate, less a 15 per cent tax offset. Payments become tax-free when they turn 60.
An annuity bought with personal cash is treated differently. The part of each payment considered to be a return of the original investment is tax-free, while the remainder is taxed at the holder’s marginal rate.
Lifetime annuities can also receive favourable treatment when Centrelink assesses eligibility for the Age Pension. Dylan Pargiter-Green, director of Bold Wealth, said both the asset and income values of a lifetime annuity receive a 40 per cent discount in those assessments.
He said this could allow some people to receive additional social security payments or qualify for a concession card, which can provide discounts on healthcare, medical costs, utilities and rates.
Estate planning and financial flexibility
The arrangements that apply when an annuity holder dies vary between products. Some allow a reversionary beneficiary, usually a spouse, to continue receiving the income or receive a death benefit.
“But these features are not uniform across products,” Ms Scott said.
Mr Pargiter-Green urged people to compare products, particularly where providing for a spouse is a priority. “Unlike super-based pensions, annuities and other lifetime income products aren’t all basically the same,” he said. “There really is quite a variety.”
Annuities can be indexed to inflation, helping payments keep pace with rising living costs. However, committing a substantial sum from superannuation or savings means that money cannot be invested elsewhere, and most products do not allow the holder to withdraw it later as a lump sum.
For that reason, some retirees use an annuity to cover only part of their income needs, retaining other assets to provide flexibility. Mr Pargiter-Green said his clients often combined certainty from an annuity with other investments and retirement assets.
Ms Scott said people considering a lifetime income product should seek professional advice because products differ in their features, conditions and consequences for estate planning.
