15
May
2016

Renewed popularity

of the Life Long Annuity

For the first time in a long time clients are now asking me about annuities and specifically life-long annuities.  So what is an annuity? In basic terms an investor purchases an annuity with a lump sum which guarantees a specified income from the investment for a set period of time. The term can range from 1 year through to a lifelong and the investor can in most cases elect to receive their initial investment or part thereof back at the end of the term. The annuity provider bares all the investment risk, but at the same time there is no flexibility for the investor.

The lifelong annuity is a fairly unique beast in the fact that it pays the investor an income for as long as they live, in many cases with an option to also pay an income as long as the spouse is alive as well.

The lifelong annuity was reasonably popular up until 2004, with the main reason being that funds invested in an annuity were not assessable for Centrelink purposes.  In 2004 to changes were introduced to have half of the value assessed in the assets test and after 2007, the annuity became assets test assessable. Once the favourable Centrelink treatment was removed the annuity went out of fashion, but recently has made resurgence.

There a few key factors that have led to this revival; most notably improvement in the annuities themselves and again changes to Centrelink.

One of the biggest reasons many have previously not considered an annuity is that once the policy is commenced there is no opportunity to exit and there is no flexibility what so ever. Clients were often very concerned if they die early that their estate was greatly disadvantaged.

One of the leaders in the annuity market has made significant improvements to the life-long annuities solving these issues by introducing a withdrawal period that allows clients to access their funds (or part thereof) and exit the annuity inside the first 15 years, albeit with some conditions. Inside that period there is also a guaranteed death payment to the estate. These improvements alleviate the major concerns that many investors had with annuities and makes the option more viable.

The major driver however has been the changes to Centrelink income tests for the most popular income stream, the allocated pension. Until recently for Centrelink income test purposes, assessable income for an allocated pension was calculated by using a formula based on the initial investment and life expectancy which determined a figure known as the deductible amount that was subtracted from the actual income received. This is no longer the case, with assessable income now being determined by using the deeming rates, which in most cases is less favourable than the previous system.

For income test purposes annuities are still treated under the previous system. In many cases now, by taking some funds out of an allocated pension and instead investing in an annuity, the client maybe able to increase their Centrelink payments (you should always get advice on your own circumstances when making these decisions as there are numerous factors that determine the appropriateness of this strategy).

 

With the potential for increased Centrelink payments and the guaranteed income for life, we are now seeing what not long ago was a niche strategy becoming appropriate for a wide range of clients and might be something worth discussing with your financial advisor.

Author; Alex McKenzie Categories: Future Financial Services Blog

About the Author

Alex McKenzie

Alex McKenzie

Owner at Future Financial Services

Past:

  • Paraplanner at Zammit Partners Investments
  • Unit Trust Administrator at Colonial First State

Education

  • University of Western Sydney
  • Penrith High

About

As a Financial Planner I help people to achieve what they would like in life. This involves helping you to identify the things in life they would like , developing plans to help achieve them and strategies to protect what you already have. We do this by providing Financial Advice to guide you through your life stages.

The financial planning process involves determining a clients current situation and financial objectives and tailoring strategies to assist in best achieving those objectives.

I am an expert in superannuation, investments and insurance, these are tools we use to help you achieve your goals.

I aim to use my knowledge of superannuation, taxation and Centrelink to efficiently use your assets and income to achieve your financial goals.

Retirement and pre-retirement planning, wealth creation, asset protection, insurance planning and estate planning are all areas of advice that I provide.

Leave a comment

You are commenting as guest.