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Deeming exemption boosts annuity interest for part age pension, Com. Sen. Health Card seekers 

February 24, 2015
Deeming exemption boosts annuity interest for part age pension, Com. Sen. Health Card seekers

Maggie Tagg, who writes Citadel 'Financial Info on the Go' for GSA, says an annuity works like a regular pay cheque in retirement. The advantage of buying an annuity within super is that your annuity payments are tax-free once you turn 60.

Annuities have been enjoying an upsurge in popularity since the global financial crisis, but they are about to become even more attractive to new retirees thanks to changes in the deeming rules.

That's because annuities are exempt from the new deeming rules which will impact any account- based superannuation pensions that are started after January 1. (i)

As a result, holding an annuity may help your chances of receiving a part age pension or the highly-prized Commonwealth Seniors Health Card.

What is an annuity?

An annuity works like a regular pay cheque in retirement. Basically, you buy a guaranteed income stream with a lump sum, using either your superannuation money or funds outside super.

You can buy the annuity for life which is the more popular choice, or for a fixed term ranging from one year to a maximum of 50 years.

The advantage of buying an annuity within super is that your annuity payments are tax-free once you turn 60. The downside is that you will then be subject to the minimum annual withdrawal amounts which range from 4 per cent for those under 65 to 14 per cent for those aged 95 or more.(ii) You can choose whether the income is paid monthly, quarterly, half-yearly or annually. The amount you will receive is determined at the time of taking out the annuity although you can choose to have the sum indexed so it keeps pace with inflation.

Currently there are only three providers of annuities Challenger, CommInsure and BT - but many submissions to the Murray Financial System Inquiry called for annuities to play a greater role in the retirement sphere.

What do they pay?

The rate of payment will depend on the features you select at the outset.

On a fixed-term annuity the longer the investment period, the higher the rate, similar to a term deposit. Rates are also higher if the principal is paid back progressively, rather than in a lump sum on maturity.

Progressive repayment of principal is popular among people who know they have insufficient capital to live on the investment income alone.

Payment rates for lifetime annuities depend on your gender and the age you start the pension.

You may also trade off higher payments against features such as a reversionary income stream where your beneficiary receives the remaining income payments if you die before them.

The benefits

It is not just the exemption from the new deeming rules that makes annuities attractive to retirees. Or the fact that there are no management or other fees.

Annuities came into their own after the financial crisis highlighted the risks associated with account- based pensions where you are vulnerable to movements in financial markets.

In contrast, annuities offer a regular, certain income regardless of the performance of the underlying investments.

Another reason for the renewed interest in annuities is that Australians are living longer and many of us run the risk of outliving our retirement savings.

Today's average 65- year-old male can expect to live to 88 while 10 per cent can expect to live to 98 (iii).

Women can expect to live a little longer.

One way to make your money last is to take out a lifetime annuity that will pay you until death. An even better solution might be a deferred lifetime annuity.

Despite being available overseas, these are not yet available in Australia but pressure is mounting for their introduction.

With a deferred lifetime annuity you invest a sum of money on retirement but defer withdrawing income until you reach a certain age, say 80. This can be timed to kick in when your account-based pension is due to run out.

Some drawbacks

While annuities provide security, there are some negatives. For instance, you may not be able to withdraw your money as a lump sum and you get no choice in the underlying investments.

In addition, returns from annuities are generally lower than returns from account-based pensions as the money is mostly invested in fixed income products. This is particularly the case in the current low interest rate environment where you lock in the rate for the term of the annuity at the outset.

To enjoy the best of both worlds, many retirees choose to purchase an annuity in combination with an account-based pension and investments outside super.

In a world of uncertain markets and greater longevity, having an annuity as part of your retirement plan is worth considering.

i https://www.dss.gov.au/sites/default/files/documents /09_2014/dss1430_a4_fact_sheet_-_deeming_v4.pdf

ii http://supergroup.com.au/resources/pensionminimums-and-maximums-2014-2015/

iii http://www.challenger.com.au/retire/lifeexpectancy

Editors Note: Maggie Tagg is an Associate Financial Planner, who holds an Advanced Diploma of Financial Planning. General.

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