Exploring Annuities for Safe Returns and Centrelink Concessions in 2024 January 19th, 2024

Combining safety with generous investment returns and significant Centrelink concessions, annuities are now very much a part of the retirement planner’s toolkit.

An annuity is a form of retirement income stream where the investor exchanges a lump-sum amount for a guaranteed income stream, paid for a specified period of time.

That period could be for just a few years or for the rest of your life — no matter how long you live.

Add-on features include:

1. Annual indexation of the payment rate, either at a fixed amount or to the Consumer Price Index (CPI);
2. A guaranteed payment period during which payments continue even if you die;
3. Reversionary ownership with a partner, which means they would continue to receive all or a portion of your payment;
4. You can opt to have limited access to lump-sum amounts along the way.

The risk of the annuity provider paying out for a longer period or making lump-sum payments needs to be factored in, and the simplest way is to reduce the contracted payment amount from the start.

That means removing or adding on features, which usually change the regular payment amount you receive.

Generally speaking, payments from a lifetime annuity cease once the investor dies. No amount is returned to the estate unless you decide to add on that feature.

While annuities are relatively inflexible once they start, the safety of the investment and the certainty of future payments make them highly attractive.

Are they risky?

There’s no small print in the paperwork that says you risk losing all or some of your capital, but equally there’s no government backup like the financial claims scheme that protects depositors in banks, building societies and credit unions.

Instead, annuity investors rely on the very strict government controls imposed on providers.
Providers are directly supervised by the Australian Prudential Regulation Authority. This is the same authority that supervises the banking sector.

APRA’s role is to continuously ensure an annuity provider has sufficient capital and reserves to meet the payment obligations of the fund now and into the future.

Under that regime, no annuity provider has ever gone bust.

Also as a result of these very tough conditions, there are only two mainstream lifetime annuity providers in Australia: Challenger Life and Resolution Life (formerly AIA).

Where a superannuation fund offers a lifetime annuity, it is usually a “badged version” from one of these two providers.

Example for men and women

Recent annuity customers have benefited handsomely from the interest rate rises of the past 2 years.

For example, a 67-year-old man beginning a lifetime annuity with $100,000 to invest can expect to receive a starting payment of $5759 a year.

Importantly, this figure is indexed to the consumer price index.

If the inflation rate for the next 12 months returned to 7 per cent for example, the annual payment next year will rise to $6,162.

The payments and the indexation to CPI continue until the person dies. If the person dies before their statistical life expectancy is reached, the estate may receive a part lump-sum payment under the terms of the particular annuity contract signed at the start.

A 67-year-old woman investing the same amount could expect a starting annual payment of $5262 a year, reflecting the fact that statistically women live longer than men.

While the lack of flexibility associated with a lifetime annuity is an issue, most financial planners use them in conjunction with conventional income stream investments such as account-based pensions.

That way, you get the safety and security of an annuity coupled with the unrestricted access to capital available through an ABP.