New twist on an 'old' investment provides a guaranteed income in retirement… and can help increase age pension entitlement
Lifetime annuities have had a make-over.
Years ago they tended to be disregarded as a serious investment option by many retirees because once you put your money in there, you never had access to that capital again.
But not now.
The new generation of lifetime annuities allows you to withdraw all of your money if you wish (in the first 15 years).
And they still provide you with a guaranteed income that can last for your lifetime (unless you withdraw your capital).
Age pension advantages
In addition, they could help you to increase your age pension entitlement – under both the income and the assets tests.
Under the current Centrelink income test, part of the income from the annuity is treated as the return of capital (this is called the ‘deduction amount’) and is therefore not assessed.
And under the current assets test, the annuity has a reducing asset value. So less of your capital is counted as an asset each year.
If you are eligible for the Age Pension, this could mean more Age Pension for you (and your spouse).
How does the ‘access to your capital’ rule work?
You can withdraw your money within 15 years of the start of the annuity.
There is a twist however. The annuity is designed to be held for life so if you withdraw your money during the 15 year withdrawal period, you may receive an amount less than the initial capital you used to buy the annuity, even after taking into account the payments that have been made to you.
What happens if you die?
If you choose a reversionary beneficiary (i.e. someone who takes over the annuity on your death e.g. your spouse), or if you buy the annuity jointly with a second person, and that person survives you, regular payments continue to be made to that person for their lifetime after your death.
If you die during the first 15 years without a reversionary or joint owner, your estate will be paid an amount at least equal to your withdrawal guarantee.
However, if you die after the first 15 years without a reversionary or joint owner, your estate will receive nothing.
If you choose a full or partial indexation option, your lifetime annuity can help protect you from inflation eroding the purchasing power of your regular payments.
How should you use a lifetime annuity?
If one of these investments is appropriate for you, it will typically form part of a diversified portfolio your adviser builds for you. That portfolio might also include account based pensions, as well as non-superannuation investments which might include managed funds, shares, property, cash and fixed interest investments.
The objective is to help you obtain your required level of regular, secure income and capital growth, while minimising taxation and optimising age pension entitlements (if that is appropriate for you), so you can enjoy a financially secure retirement.
Disclaimer: This article is not legal advice and should not be relied on as such. Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. You should obtain financial advice relevant to your circumstances before making investment decisions. Where a particular financial product is mentioned you should consider the Product Disclosure Statement before making any decisions in relation to the product. Whilst every care has been taken in the preparation of this information, Australian Unity Personal Financial Services Ltd does not guarantee the accuracy or completeness of the information. Australian Unity Personal Financial Services Ltd does not guarantee any particular outcome or future performance. Australian Unity Personal Financial Services Ltd is a registered tax (financial) adviser. Any views expressed are those of the author and do not represent the views of Australian Unity Personal Financial Services Ltd. If you intend to rely on any tax advice in this document you should seek advice from a tax professional. Australian Unity Personal Financial Services Ltd ABN 26 098 725 145, AFSL & Australian Credit Licence No. 234459, 114 Albert Road, South Melbourne, VIC 3205. This document produced in October 2015. © Copyright 2015