Beat the stress of volatile shares with guaranteed retirement income

For many Australians moving from employment into retirement, uncertainty about the future can cause considerable anxiety.

Even those with significant superannuation balances or large asset portfolios can find themselves daunted by the unknown. Questions such as “How long will my retirement last?” and “Will I be able to maintain my standard of living?” can weigh heavily.

Lifetime income products are designed to help neutralise such concerns. These products pay you a regular income for your entire life, taking some of the guesswork out of retirement.

An annuity is one type of lifetime income product commonly taken up by retirees. Unlike other similar products, it can also cover a fixed term, such as 10 years.

“Put simply, an annuity can be a way of achieving peace of mind,” says Natalie Scott, SMSF manager at HLB Mann Judd.

Unlike super balances, fixed or CPI-linked annuities are not affected by market performance, providing certainty for those who find investment risk stressful.

“With super, the performance of your portfolio can affect whether you’ll have enough money until you pass away. An annuity can solve that problem.”

Tax treatment and the Age Pension

The way the income you receive from an annuity is taxed depends on how you paid for the product.

If you fund the annuity using your super and you’re aged 60 plus, payments are completely tax-free, just like super income.

If you use your super to buy an annuity between the ages of 55 and 59, you will pay your marginal tax rate minus a 15 per cent tax offset. When you turn 60, the payments become tax-free.

You can also use personal cash to take up an annuity. In these instances, the portion of each payment deemed to be returning your principal investment is tax-free, and the remaining portion is taxable at your marginal tax rate.

One notable advantage of annuities purchased as a lifetime income stream in retirement is the favourable treatment they receive from Centrelink, says Bold Wealth director Dylan Pargiter-Green.

“When Centrelink weighs your assets and income for Age Pension eligibility, lifetime annuities receive a 40 per cent discount on both the asset value and the income value,” he says.

“This can create a strategy where a client can access additional social security payments or receive benefits via a concession card, entitling them to a raft of discounts on healthcare and medical costs, utilities and rates.”

Annuities and estate planning

Not all annuities behave the same way when the product holder passes away, Scott notes.

“Some products do allow the holder to nominate a reversionary beneficiary – usually a spouse – who can take up the annuity after the holder passes away, or who might receive a death benefit,” she says. “But these features are not uniform across products.”

Pargiter-Green recommends those considering an annuity compare a range of products, particularly if the welfare of their spouse is a primary concern.

“Unlike super-based pensions, annuities and other lifetime income products aren’t all basically the same,” he says. “There really is quite a variety.”

Weighing your options

Annuities can be a smart choice for many retirees. Unlike super balances, fixed or CPI-linked annuities are not affected by market performance, providing certainty for those who find investment risk stressful. Many annuities can also be indexed to inflation, helping protect against the rising cost of living.

On the flipside, committing a large sum of money from your super balance or personal savings prevents you from investing that money elsewhere. Most annuities also lock you in: generally, you cannot withdraw your money as a lump sum.

Pargiter-Green says annuities can serve a valuable purpose but adds that many of his clients use them only as a portion of their overall retirement income.

“We aim to build a combination of flexibility and certainty in our clients’ strategies,” he says. “This means that a client or family group may hold a number of different assets in retirement, designed to give them a range of outcomes. Annuities are one piece of the puzzle that may be used if they align with the client’s goals.”

Scott agrees that lifetime income products can be suitable for retirees in a range of situations but stresses the importance of due diligence.

“Each product has different features, conditions and estate-planning implications, so it’s crucial to seek professional financial advice to ensure the annuity complements your overall retirement strategy and meets your long-term objectives,” she says.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their personal circumstances before making any financial decisions.

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Dan F Stapleton writes on First Nations issues, visual art, property and more. His writing has appeared in The New York Times, the Financial Times and others. He is based in Sydney.