Understanding annuities

In its most basic form, an annuity is a promise to provide a series of regular payments in return for a lump sum investment.

What is an annuity?

Annuities are becoming an increasingly popular means of ensuring reliable income streams in retirement and are evolving to meet the unique retirement needs of Australians.

With the increase in demand for annuities in Australia, the types of annuities to suit specific requirements have also increased.

Types of annuities available

Term annuities

Term annuities provide regular and guaranteed payments for a term chosen by the purchaser. The minimum term is one year and the maximum term is 50 years. Annuity payments are for the duration of the term and stop at the end of the term.

Lifetime annuities

Lifetime annuities provide regular payments for the rest of the purchaser’s life. If you choose, the payments may continue for the lifetime of a second person, such as your partner, after you pass away. Lifetime annuities can help alleviate the worry that you will outlive your retirement savings.

Deferred lifetime annuities

This is a lifetime annuity where the payments do not start immediately. For example, the product might be purchased at age 65 with payments commencing at, say, age 85 and continuing for life.

Benefits of annuities

As well as the certainty of a regular income, there are other benefits in purchasing an annuity. These include:

  • They are not affected by the swings in share markets;
  • They are tax-free if bought with superannuation funds after the age of 60; and
  • You have control over estate planning outcomes via the nomination of beneficiaries.

Annuities can offer a way to help ensure that you don’t outlive your savings, allowing you to ‘layer’ your retirement income, with a fixed term or lifetime annuity on top of the Age Pension. These layers combine to offer an income stream to ensure essential household expenses can always be covered. You then have more flexibility in terms of your other savings – whether you invest them for growth or use them to enjoy your retirement.

Contact your financial adviser to determine if an annuity is right for you.

Source: Challenger Ltd

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