The pros and cons of buying an annuity

Recently, you answered a query from someone about the value of annuities – he mentioned “after 15 years, the capital will have reduced to $48,000." Does this mean you get some capital back at the end of the term, how is this calculated and how is it different for fixed-term annuities and lifetime annuities? I am on a part Centrelink pension and wonder how buying one would affect my assessment of assets/income and subsequent pension?

When you buy an annuity, you are exchanging a lump sum for an income stream but the terms of that income stream may vary widely. For example, you may decide to buy an annuity which will pay you an income for the rest of your life, but you will have to decide whether the payments will be unchanged until you die or whether you want them indexed for inflation.

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Furthermore, you may wish to include a guarantee clause whereby a proportion of the purchase price is returned to your estate if you die before, say, 10 years.

A guarantee clause will cost money, which means the payments to you will be less than if you did not have one.

Indexed payments will start off with much lower payments than you would receive in a contract where the payments are unchanged for life.

There are also annuities for a fixed term and, at the end of that term, you may receive some or all of the original capital back. For example, I have seen five-year annuities with all capital returned at the end, and a 10-year annuity which was taken out just for school and university fees for a child. This had zero capital after 10 years.

The Centrelink treatment of lifetime income products changed dramatically from July 1 last year.

The official term is “asset-tested income stream (lifetime)”. If you take out one of these products after July 1, just 60 per cent of the purchase price will be assessed for the assets test up to age 84 (or for a minimum of five years) and 30 per cent thereafter.

Annuities can be an inflexible investment and there can be exit fees if you have has a change of heart and wants to get out of the contract. This is why it is important to involve your financial advisor when deciding if one is appropriate for you, and to make sure you are aware of the disadvantages as well as the benefits that annuities carry.

We have recently downsized our home and would like to use the downsizing contribution to add to our existing allocated pensions. I have some questions please, assuming that we already meet the required criteria. Can the contribution be made to a superannuation account and then rolled over into to an existing pension account within the same fund? Does this additional contribution affect our eligibility for the Commonwealth Seniors Health Care (CSHC) card and/or the Centrelink payments made every few months? If we can't merge the two accounts, then would the original (grandfathered) allocated pension continue to maintain our eligibility for the CSHC card?

You cannot contribute to an account in pension mode, so you will need to open a new accumulation account to receive the downsizer contribution.

Your options then would be to leave the money in accumulation, in which case the income will be taxed at 15 per cent per annum, or start a new pension from the new fund. This will protect the grandfathering on the existing account.

When you downsize you are normally changing to a less-expensive residence, which means you are converting part of an exempt asset – the family home – to an assessable asset, such as cash or super. Therefore, the extra money in super will be assessed both for Centrelink purposes and for the CSHC card.

I have read articles about "the bank of Mum and Dad", and giving or lending money to children. If you decide to make a loan, is it best if the loan document has a specific term, or just states “repayable on demand”?

If the loan documents state "repayable on demand", the statute of limitations on taking legal action will start to run from when the loan begins. In other words, you have six years from when it starts during which you can sue for recovery if the borrower has defaulted.

However, if a loan specifies terms of repayment, then only when those terms are breached does the six-year time limit start to run. So, if the loan says "to be repaid in full by January 1, 2025", if it is not repaid by that date, you have a further period of six years to sue.

The golden rule is ALWAYS to seek legal advice.

My wife and I receive a full age pension. We have no assets other than our home, which we own outright. We are both aged in our 70s and are looking at selling the house and living with a daughter for about three months, after which we will buy a smaller house. During this time, the money received from the sale of the house will be parked in a bank account (assuming $500,000). My question is, how does Centrelink view this, and how does this affect our age pension while it is parked?

Your home is not counted under the assets test. If you sell it, the proceeds will be exempt for up to 12 months, as long as you are planning to use the money to buy another property.

However, the proceeds will be deemed under the income test.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. [e-mail]