Annuities
Get a guaranteed income
An annuity pays you a guaranteed income for a set period of
time. You can choose whether you want the payments to last a
lifetime or a fixed number of years. Unlike other retirement phase
income products, annuities give you certainty, you know how much
you'll get and how long it will last.
How annuities work
You can buy an annuity (also known as a lifetime or fixed-term
pension) from a super fund or life insurance company with a lump
sum from your super or other savings. If you're using super money
you must have reached your preservation age
and met a condition of release.
How much income will I receive from an annuity?
The income you will receive is fixed when you purchase the
annuity, however it can be indexed each year, either by a fixed
percentage or in line with inflation.
How often are annuity income payments made?
Income payments can usually be made monthly, quarterly,
half-yearly or yearly.
How long do income payments last?
When you purchase the annuity you will choose whether you want
the payments to last for the rest of your life, your life
expectancy or a fixed number of years.
What happens to my annuity when I die?
If you nominated a 'reversionary beneficiary' then the income
stream payments will continue to be paid to your nominated beneficiary, such as your spouse or
dependant. Usually they will receive a reduced level of income
payments from what you received. For example if you bought an
annuity and nominated your spouse as the reversionary beneficiary,
they might continue to receive 60% of your income for the rest of
their life, after you have passed on.
Alternatively, you can choose the guaranteed period option. If
you die within the specified guaranteed period, your beneficiary
will receive the remaining income payments as an income stream or
lump sum. Unlike the reversionary beneficiary option, the income
payments received under a guaranteed period will not reduce and are
only paid for the guaranteed period.
Will I qualify for the Age Pension if I receive income from an
annuity?
Your Age Pension entitlement is determined by an income test and
an assets test. The balance of your annuity will be assessed under
the Centrelink assets test. Part of the income you get each
financial year will be assessed under the income test. The test
that results in the lowest Age Pension being paid to you is the one
that Centrelink will apply. Contact a
Department of Human Services' Financial Information Service
(FIS) officer to find out whether an annuity will affect your
Age Pension entitlement. See social security for more details.
New transfer balance cap
On 1 July 2017 a cap was put on the amount of money can be
transferred to a tax-free account-based pension or annuity. The new
limit is known as the 'transfer balance cap' and it has initially
been set at $1.6 million. Details of the changes can be found on
the Australian Tax Office (ATO) website.
Benefits of annuities
An annuity is a way of receiving a regular guaranteed income
after you have retired from work. Benefits include:
- You are paid a guaranteed income regardless of how markets
perform
- Annuities purchased with super money are tax free from age
60
- Annuities purchased with super money before age 60 will have
the taxable portion taxed at your marginal tax rate, however, you
will receive a 15% offset.
- Only the income component (if any) of an annuity purchased with
non-super money is taxable
- You don't pay tax on investment earnings
- Income payments can be set to increase annually at the time the
annuity is purchased
Case study: Peter chooses a lifetime annuity with a guaranteed
period
Peter is 65 and married. He invests $200,000 in an annuity which
will pay him a regular income of $800 each month, increasing with
inflation each year, for the rest of his life. Peter likes that the
annuity has a 15 year guaranteed period, which ensures his wife
Christine will receive his income payment for a while should he die
during that period.
Drawbacks of
annuities
There are a couple of things to be aware of before you start an
annuity:
- You cannot take out your money as a lump sum
- You cannot choose how your money is invested
- You may not be able to transfer it somewhere else if you change
your mind
- Over the long term, an annuity may pay less than a market-linked investment
An annuity is a good choice if you want the
security of a guaranteed income for a certain period of time. Seek
financial
advice from a licensed adviser if you're not sure if this is
the right choice for you.
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Last updated: 04 Feb 2019
