A big part of my videos is explanation of how best you can prepare for retirement income-wise,
what type of income streams are available to you, and impact of each one of them on your Age Pension eligibility.
I've already explained account-based pensions, otherwise called allocated pensions.
To understand how this type of income stream works watch my video
"Account-Based Pensions - good and bad explained".
Obviously one of the most important types of an income stream in retirement is Age Pension itself,
and you have lots of videos on my channel explaining various issues of Age Pension eligibility.
Watch my latest video: “Age Pension changes”
Alternatively you can watch the full series starting with: "9 ways how to legally hide money from Centrelink Age Pension"
There is also another type of an income stream, that I have not explained yet... till now,
however based on lots of questions and feedback from you, I think it is time to discuss annuities.
I honestly believe there is a lot of misconception and misunderstanding about this type of an income stream.
Just like any other financial instrument,
it can work in your favour if you know when it is appropriate to use it, so it can complement other sources of income.
Annuity can work wonders for some and not help others all that much, it all goes back to your income requirements,
your investment risk appetite, how you feel about money, what type of income stream you require,
is income security of importance for you and your overall financial set up.
So today, I want to explain:
1. What annuities really are?
- as I see them being misunderstood and misinterpreted by many
2. How are annuities guaranteed?
3. What types of annuities are available?
4. How do annuities work?
and 5. Benefits and negatives of annuities
My name is Katherine Isbrandt from About Retirement.
I am Certified Financial Planner, and you are watching About Retirement TV,
the place that will provide you with information you need to get ready for your retirement or if you have already retired,
how to improve your retirement lifestyle from the finance point of view.
"People always live forever, when there is an annuity to be paid to them" - Jane Austen
An English writer best known from her novel "Pride and Prejudice"
And an amazing thing is, that to a degree this quote still correct today.
Annuities are what can provide you with an incredible degree of income security and reliability for as long as you choose.
So let's jump into our topic of today:
1. What are annuities?
In a simplest form annuity is a contract between you and the financial institution, which is a life office,
that will provide you with a predetermined level of income
for an agreed and specified investment term for a specific lumpsum that you invest with that life office.
The holding institution issues a stream of payments in the future
for a specified period of time or for a remainder of your life.
2. How are annuities guaranteed?
Annuities are a very special form of an income stream, that is subject to restrictions outlined by
the Life Insurance Act and regulated by the Australian Prudential Regulations Authority (APRA),
who continuously monitors investments made by the life office ensuring that the life office
can always meet their obligation to you to receive payments as per your annuity contract.
APRA is the authority that regulates the banking, insurance and superannuation industries.
Life office is required to have a statutory fund that holds enough capital to withstand any market changes.
This is why, even if we've gone through a huge major market crash, such as the Global Financial Crisis, Covid,
or even now Ukrainian war that immediately impacted the world markets with uncertainly and volatility,
your annuity payments are still made from that statutory fund.
APRA is the body to safeguard all your future payments for life of your annuity.
3. What types of annuities are available to you?
In Australia these days we have several types of annuities that have been created for a specific reason
or a specific outcome such as: Term Annuities, Lifetime Annuities , and Annuities that can assist with Aged Care
it is important to know that you can invest into an annuity your private money so your money from your bank account
or your superannuation money, which you can do by rolling over a specific amount
from existing superannuation fund or your pension fund.
4. How annuities work?
To make sure that this video is not too long, today I will explain Term Annuities,
and next week I will give you a full explanation the other two types.
So let's talk about Term Annuities
They are similar to your usual Term Deposit, but rather than issued by your bank,
you set it up through the application to a life office
and you can choose the term from 1 year up to even 50 years with income that can be paid monthly,
quarterly or annually, with a possibility of income reinvestment at maturity
and with your total asset being repaid back to you at the end of the term of that annuity.
Why would you invest then into Term Annuity as opposed to a Term Deposit or a High-interest savings account?
Well, these days the last option of High Interest savings accounts is just a joke,
there is hardly any interest paid to investors any longer, so I am not going even to bother to compare those two.
But when comparing with a Term Deposits:
Annuities can provide a slightly better rate of return over those shorter terms,
but obviously you need to check those rates as they change weekly or
monthly depending on cash rates at the time of commencement of your investment.
Also the choice of investment term is greater
with term deposit it is usually up to 5 years but please check with your bank
as I mentioned before annuities can run as long as up to 50 years
you can choose to have your regular payments increased in line with CPI,
unlike term deposit, or you can choose the payments to you to include ongoing
repayments of your own capital with zero balance at the end of the investment term.
The big benefit is that you can nominate one or more beneficiaries that will receive the
Term Annuity as a death benefit if you pass away, unlike term deposit or any bank account you set up,
where in most cases you have no choice, but your savings will be paid out to your estate.
And sometimes there is a reasons, why you don't want a particular pool of funds to be distributed to your estate,
but rather avoid Will distribution for that particular asset.
If this is your situation, you really need a solid financial advice, how to set up your assets from Estate Planning perspective.
As mentioned before, I will go over Lifetime annuities and Age Care specific annuity next week,
as they require a much longer explanation.
5. Benefits and negatives of annuities:
Let's start with benefits
payments are provided to you for the life of the annuity contract
payments are guaranteed as per my previous explanation.
Well you can choose your Age Pension eligibility under Income or Assets test.
Due to market downturn, your account-based pension can reduce in value dramatically,
which will then impact the level of your retirement income most likely for the remainder of your retirement,
but lifetime annuities, once set up are guaranteed to provide your income payments for the term set up in your application,
regardless of market behaviour, regardless of changes in regulations,
this is just about the only true income guarantee you find in Australia.
Annuities can address the risk of outliving your savings.
in specific situations and when set up correctly, annuities can assist with improvement of your Age Pension payments.
Just watch my video: “How to improve income and lifestyle in retirement”.
I will link that video at the end with my recommendations.
If an annuity is set up with superannuation money, your income payments are tax-free
you have a choice of beneficiary, and if annuity is set up with superannuation money,
you can even nominate your spouse as a “reversionary beneficiary”. Sometimes it is beneficial, other times not so much.
Generally, annuities have no product fees, so unlike account-based pensions,
there is no account keeping fees, investment management fees, administration fees – well, none of those.
So now let's have a look at negatives of annuities.
Well, once set up, they cannot be altered
Money is locked away which can be a benefit or a negative depending on your situation
You cannot make partial withdrawals. There is a predetermined withdrawal period disclosed to you in a quote
and during that period if you need to make a withdrawal you have to withdraw the full balance and cancel the annuity.
Annuities can be complex; therefore, you really need a professional advice how to set them up correctly for your benefit,
otherwise you may end up with a product that is not assisting you with reaching your retirement income and assets goals at all.
Here it is, our very first review part 1 of annuities.
I hope you found this video of value, and if this is the case,
please give it a LIKE and SUBSCRIBE to this channel not to miss my next video.
And for more retirement information, please visit my website, AboutRetirement.com.au,
and while you are there, sign up to my newsletter to be kept updated with all the changes that can impact your retirement.
And now my recommendations: watch the other income stream video:
Account-based Pensions good and bad explained.
The second video recommended to watch is:
How to improve income and lifestyle in retirement
I think it is a fantastic video explaining
different income options.
I will speak with you in my next video, bye.