Why annuities are now hot property for money-conscious retirees

For over a decade, successive governments have wrestled with the challenge of building an effective retirement income system. There have always been two main choices: draw a pension from super – which means dealing with market volatility – or opt for a lifetime pension, an annuity, which means sacrificing flexibility.

Governments also want to encourage retirees not to live too cautiously, as this locks money out of circulation in the economy. To encourage greater spending means changing ingrained habits and removing people’s fear of outliving their savings. The challenge is balancing security with the ability to enjoy a well-earned retirement.

If you’re contemplating retirement in the not-too-distant future, it’s important to make sure your finances are in order.Credit: Michael Howard

One way to encourage retirees to have a more comfortable retirement is to provide them with greater certainty by converting a portion of their super into a reliable income stream. The traditional term for this is an annuity: a financial product where you exchange a lump sum today for a guaranteed income for life.

Early annuities were simple but inflexible, which made them unpopular. The main concern was that if someone died just a few years after purchasing one, their remaining capital simply vanished, leaving nothing for their heirs.

There was also the issue of protecting against inflation: retirees could choose between receiving level payments for life or receiving indexed payments, but the indexed payments took 10 years to reach the same income as what they would’ve had 10 years ago by choosing level repayments.

The good news is that, with government encouragement, the annuities market has evolved significantly, offering a broader range of options with added flexibility. These new products tend to be called lifetime income streams, and they can be complex due to the wide range of choices.

It’s well worth exploring these new lifetime income products – and essential to seek expert advice tailored to your circumstances.

A growing number of providers now offer these lifetime income streams. These include Challenger, Australian Retirement Trust, Generation Life, and AMP. Each product has its own unique features, making it even more important to choose carefully.

Retirees will need to make many decisions. Do they want an annuity for a fixed term or for life? Should couples get one in joint names, ensuring payments continue to the survivor? Will it be indexed for inflation or paid as a fixed sum?

Should there be a guaranteed period, such as 10 years, where some money is refunded to the estate if the recipient dies? Will it qualify for Centrelink concessions that could boost the net return? And should it be fully or partly market-linked to allow for greater exposure to growth?

The good news is that, for many Australian retirees, converting part of their super to a lifetime income stream can offer significant advantages. The following case study was provided by Challenger.

Robin and Kerry, both 67, own their home and are ready to retire. Between them, they have $700,000 in super, plus $50,000 in cash and term deposits and $20,000 in non-financial assets. Their goal is a comfortable retirement, spending $73,031 a year – the ASFA “comfortable” retirement standard as of September 2024 – indexed for inflation.

By allocating 25 per cent of their super to a lifetime income stream instead of relying solely on an account-based pension, they boost their age pension by $5460 in the first year and by more than $19,000 over five years. Moreover, they secure a guaranteed income for life, starting at approximately $9300/year and fully indexed by CPI, reducing their reliance on the age pension.

This strategy gives them a much better chance of meeting their spending needs, helps their account-based pension last longer, and delivers more income over their lifetime.

Just as importantly, it enhances the financial benefit to their estate, ensuring greater security for their beneficiaries. For Robin and Kerry, this simple shift means more financial certainty and a stronger foundation for the years ahead.

It’s well worth exploring these new lifetime income products – and essential to seek expert advice tailored to your circumstances as you consider them.

One of their key advantages is the government support they enjoy, which exempts 40 per cent of the capital invested from the relevant Centrelink/DVA asset test. This boosts the age pension, making it particularly beneficial for couples with assets between $650,000 and $1 million.

Noel Whittaker is the author of Retirement Made Simple and other books on personal finance. Questions to: [e-mail]

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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