Purchasing an annuity: Strategy for looming asset test changes

By Liz Maroney, Westlawn Wealth Adviser
SMSF Specialist Advisor™
30 November 2016

Last month, I wrote about the changes to the Age Pension assets test due to come into effect on 1 January 2017. These changes will mean approximately 91,000 part-pensioners will lose their entitlements and a further 235,000 pensioners will have their entitlements reduced.

For those who may be adversely affected by the assets test changes, there a number of strategies available that could help reduce the value of assets counted towards the assets test. Of course, suitable strategies will depend on your individual situation, so you should first speak with your financial adviser before taking any action.

Some possible strategies are outlined in my previous article which you can read here.

As one of those strategies involved purchasing a long dated zero residual capital value (RCV) annuity, this month, we’ll cover the basics of annuities.

What is an annuity?

An annuity is an investment that pays you a guaranteed income for a defined term. You can choose an annuity that provides payments either for a fixed term or for the rest of your life.

The earning rate is fixed at the time you purchase the annuity and applies for the entire term, regardless of any sharemarket or interest rate fluctuations. As income payments are guaranteed by the annuity provider[1], this offers a level of certainty, especially in times of increased market volatility.

Conversely, as the earning rate is set at the time of purchase, you will not benefit if markets or interest rates rise.

You can purchase an annuity with superannuation money or money held outside the superannuation system. There may be tax benefits to using superannuation money in certain situations.

Fixed term annuities

Fixed term annuities have a fixed start date and end date. The minimum term is one year and maximum term is 50 years. Your annuity payments are made for the duration of the specified term.

Lifetime annuities

Lifetime annuities provide payments for the rest of your life. Payments start when the investment begins and continue for the rest of your lifetime. You can also choose to continue payments, in full or in part, for the lifetime of a second person (such as a spouse or other dependant).

By providing payments for the rest of your life, lifetime annuities provide certainty in that you will not outlive your retirement savings.

Residual capital value (RCV)

This refers to any capital that is left at the end of an annuity term. The residual capital value is usually set by you when you purchase the annuity. You can choose from 100% residual capital value, where your entire investment is returned at the end of the term, through to zero residual capital value.

Features of an annuity

Some of the features of an annuity include:

  • Security – Your regular income payments are guaranteed by the annuity provider, regardless of sharemarket movements or interest rate fluctuations.
  • Flexible terms and payments – You can choose an investment term from as short as one year to as long as 50 years or for your lifetime. You can choose to receive guaranteed income payments monthly, quarterly, half-yearly or annually.
  • Lifetime income – For a lifetime annuity, you can enjoy regular, dependable payments for the rest of your life, or, if you choose, the life of another person.
  • Seniors benefits – Some annuities may help you access or increase benefits like the Age Pension and Commonwealth Seniors Health Card.
  • Inflation protection – With some annuities, you can elect to index your payments so they keep pace with inflation or increase payments at a fixed indexation rate.
  • Tax-free payments – Generally, payments are tax-free for those aged 60 or over if the annuity was purchased with superannuation money.
  • Access to your money – If you cancel your annuity, in most cases you will receive a withdrawal amount, but you may receive back less than you invested and less than you would have received had you held the annuity for its agreed term.

Depending on your individual situation, purchasing an annuity as part of your overall investment portfolio may be beneficial. You should first seek professional advice before making any decision.

Contact Liz Maroney

If you’re unsure as to whether you will be affected by the assets test changes, or if you’d like to discuss strategies to reduce the value of your assets counted towards the assets test, please contact me to discuss your situation:

Copyright © 2016

[1] The guarantee is provided by the financial organisation providing the annuity. The annuity is subject to the risk of the company providing the annuity collapsing. The government guarantee on certain bank deposits does not apply to annuities.

Westlawn Wealth Adviser, Liz Maroney is a ...

General Advice Warning
The advice on this site may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial, tax and/or legal advice prior to acting on this information.
Past performance is not a reliable guide to future returns.
The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. 
Opinions constitute our judgement at the time of issue and are subject to change. Neither, the Licensee or any of the National Australia group of companies, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.
Liz Maroney and Westlawn Wealth Management Pty Ltd ABN 32 124 861 409, Authorised Representatives of GWM Adviser Services Limited ABN 96 002 071 749, Australian Financial Services Licensee, 105 -153 Miller Street North Sydney NSW 2060.