When it comes to planning for retirement, a common question I receive is “what’s a safe way to invest my money?” Suddenly, years of planning to grow your assets as large as possible are now flipped, and protecting those assets becomes priority number 1.
In reality, what many people want is not an asset that never runs out, but rather a source of income that is reliable and consistent. After all, for the last 30-40 years, you may have become very accustomed to receiving a set amount, after-tax, in your bank on payday. This may be comfortable and is often a real reason that anxiety can creep in when it comes time to turning that tap off.
So, what assets can give you a reliable source of income for the next stage of life’s journey? Annuities may offer up just that.
An annuity is an asset that can provide you with a guaranteed level of income for a specified period or the rest of your life. Some of the benefits of annuities are:
You know how much income you will receive each payment (and this can even be linked to CPI to increase each year with inflation).
Not Linked to Markets
Your income is not linked to the performance of share markets, which can provide further security in adverse market conditions.
The income may be tax-free upon drawing – as superannuation money can be used to purchase an annuity.
If you take a lifetime annuity, you are guaranteed that your money will not run out during your lifetime.
Estate Planning Benefits
Annuities can provide estate planning benefits, with some products offering fixed benefits during a set period if you were to pass away.
They have preferential treatment for Centrelink pensions, both for the Assets and Income test (which may mean a higher Centrelink pension payment). Depending on the eligibility of the annuity, currently, only 60% of the annuities value and income is counted towards these tests.
For more information on the treatment of annuities for Centrelink purposes, refer to the website here.
As with any asset, annuities are not without their trade-offs. Some of the disadvantages of annuities include:
- Inflexibility of the income stream being drawn (unable to adjust what you are drawing);
- The asset is defensive in nature, providing an income stream only and no capital growth (your money will run down over time);
- There is often limited or no ability to access your capital in the future if your situation changes;
- The effective running costs are higher than wholesale investments;
Nevertheless, an annuity may form part of a well-structured retirement solution and may be suitable for a retiree looking to provide certainty around some of their “can’t live without” income needs.
For more information, feel free to book a meeting with one of our qualified financial advisers.
Teneale Laister (CFP® Professional, AFP®, BCom[Fin,FP,Mgt](Hons), ADFS[FP]) is a representative of Alman Partners Pty Ltd, Australian Financial Services Licence No:222107.
Note: This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.