Annuities are selling like hot cakes but are they for you?

Rising interest rates mean that annuities – where you buy a future income stream – have become attractive once more.

Income products such as annuities might appeal more to retirees who are just above the eligibility threshold for the age pension.

The highest interest rates in a decade have finally revived the ailing annuities market. Retail investors, in particular, are rushing back into these wealth products as they look for income certainty in retirement.

Just this week, Australia’s largest annuity provider, Challenger, said it had experienced a 90 per cent surge in retail annuity sales between June and December as rates shifted from being a headwind to a tailwind.

It’s not just retail investors. Overall annuity sales jumped 41 per cent over the six months, Challenger chief executive Nick Hamilton said.

“Customers today are getting an annuity proposition we haven’t really seen for near a decade. The normalisation of rates has created a far better environment for annuity sales and we’ve seen that through the very strong numbers in retail,” Mr Hamilton noted.

With rates at their highest point since 2012 and investment markets increasingly choppy, annuities – which offer a future income stream for a set price – are clearly enjoying a long-awaited resurgence.

Challenger chief executive Nick Hamilton.

And we’re not even at the peak of the rate-rising cycle yet. NAB sees 4.1 per cent as the top – that’s another 75 basis points from here – while RBA governor Philip Lowe, who faced questions at a Senate Estimates Hearing on Wednesday, still says inflation is way too high.

The rate shift is only part of the renewed appeal for annuities and builds on broader changes that have come together to make risk-free retirement income streams more attractive.

This is particularly the case for lifetime annuities which, as the name suggests, pay out a guaranteed regular income for life, regardless of how long you live.

Regulatory changes in 2017, followed by alterations to the means test in 2019 that delivered age pension advantages, set the scene for lifetime annuities to make a comeback, according to Deloitte Australia partner Andrew Boal.

As of July 2019, 40 per cent of the annuity income and purchase price is excluded from Centrelink’s means test. And from age 85, 70 per cent of the purchase price is excluded from the assets test.

There are also other forces at play that are pushing these retirement income products into the limelight, Mr Boal said.

“We’re halfway through the retirement of the Baby Boomers … Increasingly, more (of these Boomers) will be retiring with more savings,” he said.

“When you haven’t got much money, you’re basically relying on the age pension, possibly topping it up with a bit of savings.

Deloitte Australia partner Andrew Boal.

“But if you’ve got a lot more money, you ask the question ‘how am I going to use that most efficiently and effectively to give myself a better retirement?’ Annuities can certainly play a role.”

Short-term annuities are one option for those who don’t want to give up access to capital for life. Similar to a term deposit, they lock capital away for a set number of years – say two or five years – in return for a guaranteed income.

Term annuity rates tend to be slightly better than term deposits but you’ll likely have to pay a financial adviser to get one, unlike with a term deposit.

Following the regulatory changes in the past few years, new products have come to market seeking to address some of the biggest problems with these income streams, including the risk that if you die early, you forfeit all of your remaining capital tied up in the annuity.

Certain providers now allow for a lump sum to be paid to your estate upon early death.

Other new products allow for an element of risk in return for potentially a greater yield.

“There are solutions (products) now that still protect you from longevity, while giving you access to investment markets if you want to keep that risk yourself,” Mr Boal said.

“So they might guarantee you a number of units for the rest of your life and those units will go up and down in value depending on how you choose to invest.

“I think the market is going to grow strongly because of the innovations coming through. And rates going up makes them more appealing to both advisers and savers.”

But not everyone sees the appeal of lifetime annuities, particularly for those with substantial savings in retirement.

GFM Wealth Advisory managing partner Paul Nicol. Picture: Stuart McEvoy

GFM Wealth Advisory managing partner Paul Nicol suggested these income products might hold more of an appeal for retirees who are perhaps just above the eligibility threshold for the age pension. They could also be a good option for more conservative investors.

“For those who are potentially on the threshold of eligibility, or would like to enhance the amount of payments they get, and those possibly are more conservative in nature in terms of the way they prefer to invest, then annuities now – with the increased rates combined with the potential ability to assist with the assets test – are definitely looking more attractive,” he said.

Investors eyeing up an annuity need to consider that they are giving up access to their capital.

“Those with a significant level of wealth tend to find annuities less attractive due to the capital being locked up, either over a term or for lifetime,” Mr Nicol said.

“The other factor to keep in mind is in an increasing interest rate environment. If you lock in an annuity now you’re potentially missing out on the opportunity of higher rates.”

Originally published as Annuities are selling like hot cakes but are they for you?