Annuities as an Investment for Retirement?

bh5354 on 31/10/2020 - 13:01

Hi all,

Bit of a deeper topic than just hunting for bargains.
I'm currently in my mid 40s. Gone past the mid-life crisis already, so thinking of retirement and saving up for the future.
I've gone and done some research, read some books and watched youtube on pension, super, and even the FIRE movement.

The latest jargon I've come across is "Annuities".

For those who don't know, I certainly didn't before reading about it, annuities is some form of fixed term pension, where you will be guaranteed an income after retirement.
Sounds great! But any websites I read or watch on youtube, they are all very vague on details, and because it is internet, most are intended for Americans, not Australians.

So, could anyone ELI5 (Explain Like I'm 5) how annuities work within Australia?
- Do I just hand over some money to some financial institute, every month, and when I retire (age 65), I can get what ever amount was set?
- When can I get started? I read somewhere I can only start this within a SMSF account, and after the age of 55?
— This can't be right, we all 'should' retire at 65. - Like I say, I don't know any details
- Do I need some financial planner to get started? I always sceptical of financial planners, I think they are more interested in their commission than to have my best interest.

Do excuse me if I'm being too broad. I am hoping for a lengthy discussion :)
Thanks in advance :)

Financial

Comments

  • whooah1979 on 31/10/2020 - 14:06

    "Annuities".

    This reminds me of Chrisco hampers. Pay now, eat later.
    https://www.youtube.com/watch?v=v-Wy7cDLGlw

    Why would you want strangers to control your money? DYOR and take control of your own finances.

  • Donaldhump on 31/10/2020 - 14:14
    +4

    Don’t know much about them, but pretty sure you get a set amount per week, as an example if your super was 300k at say 60 and you hand it over to them and they give you 500 a week if you live longer than 16 years or so ( factoring in some growth ) you win otherwise you lose.

    I’d imagine it would be more in their favour, and who knows what happens if they go belly up, you would be a creditor and prob lose some of all.

    I’d stay clear of them but I don’t know much about them so this isn’t advice.

    Just pump money into your super in the mean time and worry about it closer to 55 or so, and gradually put more super into less risk classes as you approach 60.

    • Lastchancetosee on 01/11/2020 - 09:34
      +1

      This. And pick an industry superfund that doesn't charge huge fees.

  • Seraphin7 on 31/10/2020 - 14:39
    +2

    An annuity is, effectively, something you buy. You basically give an amount of money to an annuity provider as a one-off payment (say, $100k) and they then pay you a fixed amount every month/quarter/year for either a fixed term or for life depending upon the arrangement you have entered into.

    On your death the fixed term arrangement continues to pay out to your beneficiaries until it expires, or on the for life arrangement there may be a "redemption value" that is paid to your estate. This redemption value is dependent on a range of factors.

    Beyond some pension efficiencies, the main thing an annuity provides a discipline. You "pay away" your savings and get an income stream in return. This prevents you blowing the savings on either consumption or bad investment decisions. While this is a gross over simplification, you can effectively achieve the same outcome yourself by putting the money in the bank and drawing a small amount each month.

    An annuity is better thought of as buying a retirement income stream, than "an investment" that will grow in value over time.

    • nfr on 31/10/2020 - 15:12

      What happens when an annuity provider goes bust? Are the annuities guaranteed by federal government?

      • whooah1979 on 31/10/2020 - 15:16

        Taxpayers shouldn't have to foot the bill for bad purchases.

      • Seraphin7 on 31/10/2020 - 15:18
        +1

        Monies placed into annuities must be held separately from the monies of the annuity operator (typically a life insurance company and held in what are referred to as "statutory accounts"). These monies are not owned by the annuity operator and they cannot access them other than to pay benefits or fees in line with the contract. Therefore, if the annuity operator were to "go bust" they have no claim over these monies and in practical terms, the monies held in the statutory accounts would be simply be transferred to another operator.

      • bh5354 on 31/10/2020 - 16:21

        Can annuities provider go bust?
        That's something I didn't know. From what I read, the payout is 'guaranteed'. That's the hold point of getting it.
        https://moneysmart.gov.au/retirement-income/annuities
        Quote "A regular guaranteed income regardless of how share markets perform."

        Otherwise, yes, looking after my own retirement fund, instead of handing it over makes more sense.

        • Seraphin7 on 31/10/2020 - 16:24
          +1

          Can annuities provider go bust?

          In theory yes, but unlikely. In the event they do, see my comment above.

          Quote "A regular guaranteed income regardless of how share markets perform."

          That's because the underlying assets are not invested in the share market. Without taking a position, this can be achieved without necessarily going into an annuity.

          • kiitos on 01/11/2020 - 09:39

            @Seraphin7: Would an average investor be able to access the same conservative investments and get the same returns as a large annuity operator?

            • Seraphin7 on 01/11/2020 - 10:39

              @kiitos: The same investments are absolutely available to retail investors. The monies of the stat funds are typically and overwhelming invested in diversified bond portfolios.

  • whooah1979 on 31/10/2020 - 14:50
    +1

    This is interesting. Can they still pay when we have hyperinflation?

    https://www.challenger.com.au/personal/products/lifetime-ann…
    payments that keep pace with inflation* or are linked to the RBA cash rate

    • hoey888 on 01/11/2020 - 00:53

      Personal opinion here

      Interest rates are currently ridiculously low. RBA offical cash rate is 0.25%. If you are purchasing an annuity at or linked to those kinda of rates that is abit low for my personal liking. Think of any super/investment fund, it will more than likely generate that kinda of return conservatively invested.

      Its everybody's cup of tea. Only works in limited scenarios.

  • netjock on 31/10/2020 - 16:23
    +1

    So, could anyone ELI5 (Explain Like I'm 5) how annuities work within Australia?

    Basically like a reverse mortgage. You hand over say $1m they will give you an agreed monthly payment P&I and charge you a fee for it. Good for those who cannot trust themselves with a large pot of money or worried about fluctuations in income because like you have it right now with companies holding dividends.

    • bh5354 on 31/10/2020 - 16:32

      Thanks @netjock
      This really is ELI5 :)
      I think I'm pretty good with my finances and am a disciplined saver. Hey, just asking the question about retirement means I put in effort thinking about it.

  • bobbieb on 31/10/2020 - 16:25
    +1

    In addition to Annuities like the challenger one posted by @whooah1979, there are also investment bonds, that get special tax treatment.

    There are not a lot of them on the Australian market. Here's one: https://www.ioof.com.au/investments/products-and-services/io…

    • bh5354 on 31/10/2020 - 16:37

      Hi @bobbieb
      Thanks for that.
      IOOF quote:
      "This means that the tax on investment earnings are paid by the bond issuer at the current company tax rate of 30 per cent and after ten years from the start date, the investment is free of personal income tax in the hands of the investor."

      This sounds amazing! Forcing me to save, and I get tax benefits. Will certainly learn more on this.

    • Seraphin7 on 31/10/2020 - 16:52

      These are an often overlooked wealth creation tool.

      Like anything, there's no guarantees, but I quite like these for people in the 10 - 20 years prior to retirement group … hopefully that group have largely got on top of their finances and have a little extra cash to invest that they're unlikely to want to call on prior to retirement, but don't necessarily want to lock it into the superannuation system.

      They're no so great for younger investors who will likely need the cash for something other than retirement.

      I will say the fees on these are high compared to equivalent options outside the investment bond structure that must also be taken into consideration.

  • Ocker on 31/10/2020 - 18:34

    An annuity is not an investment for retirement, rather a product to help fund your retirement.
    Moreover annuities come in all forms to suit an individuals goals. For example, fixed period or lifetime. Lifetime can be nominated as either the purchaser of the annuity or the surviving spouse. The annuity monthly payment can be either a fixed amount, or CPI indexed.
    Or, a combination of the above.
    The thing to bear in mind is that all annuities are based on calculations of actuarial analysis of life expectancy, etc. That will determine how much you get returned for your purchase price.
    In addition, you will purchase an annuity based on todays interest rates, etc.
    All very, very, complex inputs
    Seek professional advice!!

    • whooah1979 on 31/10/2020 - 18:41

      So it is basically a scheme is get people to pay $100k per entry and slowly pay out a total of $100k over 20 years.

      There is a word for this type of schemes.

      • Ocker on 31/10/2020 - 18:57

        $100k, plus the actuarial calculation/forecast or investment returns/inflation for the next 20 years
        Not a product for the naive to jump into

        • whooah1979 on 31/10/2020 - 19:08

          The PDS says that they keep all the gains and only pay an agreed amount. Their customers are lending the company $100k interest free.
          https://www.challenger.com.au/-/media/AOL/Documents/PDS/Chal…

          We simply invest the money you give us. If we achieve investment returns that are above the amount required to cover the promises made to our annuity investors, we keep the excess amount.

          • nfr on 01/11/2020 - 13:34

            @whooah1979: I suppose that makes sense, considering interest rate is so low and might even go negative. It would be bad business if they promise you some fixed return AND also share upside with you.

    • bh5354 on 31/10/2020 - 19:57

      Cool, sounds like annuity is NOT the way to go.

  • miwahni on 01/11/2020 - 00:13
    +1

    The best thing about an annuity is that some types will pay you a guaranteed monthly payment for as long as you live, regardless of how much you originally invested. They're gambling on most investors dying before they've received the full payout of their initial investment, but for those who are long-lived, it's basically money for jam. But you have to be aware that some will stop upon your death ie if there's still unpaid funds those funds won't go to your estate. Read the PDS and get qualified advice.

    It used to be that annuities got preferential treatment from Centrelink which made them really worth having - the amount that you held in an annuity wasn't counted towards your asset test, nor was the regular payout included in your means test, so you could still qualify for a pension while receiving a good monthly annuity payout. Needless to say that loophole was closed around 15 years ago, but there are still some advantages to these products, if you don't have health issues and think you'll outlive your super. Even now only a portion of an annuity is counted under the assets test so there's still a small benefit.

  • kazoomyn on 01/11/2020 - 07:55

    There's a good explanation here:

    https://moneysmart.gov.au/retirement-income/annuities

  • WreckTangle on 01/11/2020 - 08:36

    Retirement age is 67 BTW, not 65

    • Ashbargin on 01/11/2020 - 08:51

      Age pension age is moving to 67. Not retirement age. Retirement age for say super is anytime after age 60 and if still working “retirement age” in realisation to super is 65.

  • Ashbargin on 01/11/2020 - 08:49
    +2

    Like any investment you need to look at how it fits in to your goals.

    Lifetime annuities can provide a specific outcome when looking at retirement planning. Having recommended annuities for certain clients for over 20 years I have only ever had great results. However, in the current interest rate climate they only being recommended for certain situations.

    1. As person is assets tested for age pension and will likely be for a very long time. The reason a “lifetime annuity” helps here is that 40% of the asset and income is exempt from Centrelink. Therefore say a $100k investment would increase age pension by $3,120 in the first year.

    2. Where a person needs a set amount of income and is risk adverse and perhaps concerned about longevity. In this case the if the annuity plus say age pension is enough to live off without the worry of running out of money in retirement.

    From a security point of view annuity providers are required to have more capital than banks. It is a legal requirement that they have “capital” that can withstand a least a 1 in 200 year financial year event. Annuities providers in Australia have significant great reserves than this requirement.

    • whooah1979 on 01/11/2020 - 09:12

      Like any investment

      What is the APY on a $100k buy-in?

      • Ashbargin on 02/11/2020 - 10:44

        With a lifetime annuity it depends on how long the person lives and what if any inflation increases you have. But currently with historically low rates would factor in around 2% ish.

  • Sensiekatie on 01/11/2020 - 13:40
    +3

    My Uncle had an annuity for years. He had never been a big earner as he worked at a racehorse stud as a strapper. He never married and has no kids and was very frugal. He also lived rent free on the stud property. the annuity was set up after he retired as there were family members continually trying to get money from him. One sister had borrowed for a business and never paid it back.

    He was eligible for the government pension and his annuity was paid annually and gave him a buffer. This was especially useful when he went into aged care. He died last year at 83 but that annuity made a big difference to his lifestyle and stopped the draining of his fund by leeches.

    • nfr on 02/11/2020 - 17:51

      How times have changed. Saving used to be a virtue, now central banks just want you to borrow and spend.

  • cwongtech on 02/11/2020 - 14:17

    Annuities are very close to treasury bonds..

    Their structure is essentially the same (you "lend"/give money to an entity, they give you a fixed return periodically for the life of the loan (your investment amount))

    Given the choice of bond vs annuity, a bond is better because it is highly liquid like a share.
    Annuities however can be funded via your super, and thus.. there are tax implications (benefits) vs buying a bond out of non-super funds.

    Have a look at how bonds are structured.

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