Revel in your retirement income certainty. Source: National Features
AUSTRALIANS spend more than $2 billion a year on annuities and their popularity looks set to increase as more people seek out secure, guaranteed incomes.
More flexible income streams and a greater number of people heading in to retirement are tipped to result in an expansion in the type and style of annuities available.
And as more people try to safeguard themselves against another major financial downturn, annuities are one way to receive a fixed income no matter what happens on financial markets.
Barry and Joan McGill wanted diversification and security, so they chose an annuity as a cornerstone investment.
They liked the idea of receiving a regular income regardless of what investment markets were doing, so they set up annuities to pay them enough money each month to cover living expenses.
"At first, we chose a one and a two-year annuity," Barry McGill says. "We had one in my name and one in my wife's name with different renewable dates, so at the end of each period all the capital was returned at different dates or, if we stayed in, the annuity was renewed in different years.
"Ours is through Challenger and they pay a fixed amount to us every month, you just get the income in your bank account. I think it's the best idea. You can decide the length of time you put your money in, it can even be for life if you like, it's the best thing since sliced bread.
"It suits us because there is no reduction in our capital and we get a set percentage income - no matter what. We also have other investments but the annuities are the base."
BT Financial Group head of retirement Rodney Greenhalgh says the majority of annuities are on fixed terms.
At the end of each fixed term, people have the option of taking back their lump sum, re-investing it in to another annuity or putting it in to something else completely.
However, the drawback of shorter-term annuities is that they generally pay a lower percentage return compared with long-term agreements.
"The first step is to work out what your income requirements are and how much you have in assets," Greenhalgh says. "It's not a simple thing to do and it's probably best put together with a financial planner, but an annuity basically offers a regular income stream.
"An annuity offers a high degree of certainty over what you will receive, so they are good for people who need a certain amount of money in regular intervals."
Fixed-term annuities are similar to an account-based superannuation pension, except with a super pension you must also draw down on the capital as well as the income each year, while an annuity does not require you to touch the capital unless you choose to.Account-based pensions are more flexible because they allow you to withdraw a lump sum at any time and typically offer a higher return, albeit more volatile.
However, it is the guaranteed income that is the biggest attraction to annuities, which means that if financial markets perform badly, it does not impact on either the capital or the income.
Actuary and research company Plan For Life reports a growing increase in lifetime annuities, despite low popularity because on death you can lose your total capital.
In 2011 lifetime annuity sales was just $27 million - less than 10 per cent of their previous sales high of $280 million in 2004. However, as consumers stopped buying them, the market shrunk dramatically.
Now, however, new versions of lifetime annuities are starting to attract consumers again.
Sales last year hit $75 million and they are expected to pass $100 million this year, Plan For Life says.
More flexible early death payouts have been a key attraction to the new style of lifetime annuity, which can also give the option of your estate getting some of the remaining capital or the income being paid to a beneficiary. In at least one case, lifetime annuities also allow you to back out of the contract within a certain number of years if you change your mind."There seem to be no obvious limits to the ongoing growth of lifetime Annuities," a Plan For Life report says.
"The one impediment to sales ... is the reluctance of life insurance companies, other than Challenger and CommInsure, to come back into this market sector.
"At one time there were more than 15 life companies selling this product in Australia - now the market is down to two."