Many of us have heard the term ‘annuity’, but exploring the options is not high on the to-do list. These days, annuities are not just confined to being the investment of choice for the conservative elderly, instead, annuities can take on a strategic place in many Australian’s financial planning.
Annuities can be purchased with superannuation money or with non-super money, and often age is the major determining factor here – but not always. Back in the day, annuities issued by life offices such as National Mutual, Prudential, AMP etc were fairly stock standard
Thankfully times have changed and there are now some more modern providers who have become a little but innovative, giving you a more flexible and adaptable annuity. To work out the best type and provider of an annuity your situation, please talk to one of our financial advisers.
So what are some of the key points:
- You will always start with the amount to be invested – say $100,000. This is the capital value.
- You have lots of discretion over the term of the annuity, and there is a lot of choice around this, 2 years, 5, 10, even a lifetime annuity which runs all the way through until your death, and plenty of other terms in between.
- Then you need to select how you will be paid over the life of the annuity and also at the end.
Eg – an RCV 100% will see you get 100% of your money ($100,000) back at the end of the term of the annuity – perhaps in 5-10 years. This means that you will just receive periodic interest until that maturity date. An RCV 0% means you will receive no lump sum at the end of the term as the original capital has been paid out to you over the life of the term, along with the interest.
- The interest rate – this is the return you will receive and can often be one of the determining factors in selecting the annuity provider.
- Death – can your annuity revert to your spouse in the event of your death, will a lump sum be paid out, do you forego everything if you were to die.
There are lots of important decisions to be made here and that is why professional financial planning advice is essential.
Being a more conservative investment, don’t expect return in the order of 10%, at the moment, even half this rate would be a really good return. But also remember, you want it to be a conservative investment as your annuity needs to do what it promises – provide you with stable, consistent and reliable income. You do not want to be seeing negative return from your annuity, which is why they turn away from shares and property as their primary source of investment returns.
And it is for this reason that some modern applications of annuities inside a Self Managed Super Fund can be quite beneficial. Almost thinking of an annuity as a long term defensive investment – somewhat akin to a long dated term deposit. Annuities can help to balance out some of the risk associated with the property or share exposure you may have within your portfolio. Or perhaps a strategy would be to have a few years of pension payments funded by the annuity and to afford the somewhat luxury of taking a longer term approach to share investing when markets are not being so nice to your portfolio – no one wants to be a forced seller of good investments just to put bread on the table in retirement.
Annuities can also play an important role when it comes to Centrelink and also Aged Care assistance, so being mindful of your health conditions and expectations around your future life expectancy need to be made.
Many retires like the idea of layering their sources of income:
Perhaps a base amount of Government Age Pension, topped up with an annuity income, then another layer of pension income which might be a bit more unpredictable and not guaranteed, and finally some non pension investment income such as interest, dividends or rent.
So no matter what stage of life you are in, an annuity can be of worthy consideration in a long term financial plan.
Understanding all of the ins and outs can be confusing and daunting, but that is where the team at GNS Group can help you and your family. Our financial advisers are well trained in this area and being Authorised Representatives of Count Financial, allows us to provide a range of solutions most suited to your situation. Call our office today for an appointment.