Annuities – How Guaranteed Lifetime Income is More Attractive Than Ever

In the current economic climate, with record low interest rates (and hence term deposit rates), the search for a steady, reliable return on investments is becoming ever more difficult.

‘It is particularly concerning that many older Australians are now having to invest larger and larger proportions of their super pension/retirement portfolio into ‘growth’ assets such as shares and listed property, due to the fact their ‘defensive’ assets are no longer helping carry the burden’.

Recognising this problem, the Australian Federal Government has recently amended the treatment of lifetime annuities with regards to Centrelink assessment, meaning you can now use an annuity product as part of an effective pre & post retirement planning strategy.

So how does an annuity strategy work? When you apply for a Centrelink Age Pension, your assets (besides your primary residence) are assessed on application, and are assumed to earn a set rate of return, which is called ‘deeming’.

Current deeming rate thresholds are as follows:

• For singles - Amounts up to $51,800 are deemed to earn the lower deeming rate of 0.25%. That portion over $51,800 is deemed to earn the higher deeming rate of 2.25%

• For couples - Amounts up to $86,200 (combined) are deemed to earn the lower deeming rate of 0.25%. That portion over $86,200 is deemed to earn the higher deeming rate of 2.25%.

This means that for the majority of your assessable assets, Centrelink assumes a return of 2.25% return on your money, regardless of how the assets actually perform. The more assessable assets you have, the lower your potential government Age Pension is, until you reach the upper asset threshold whereby you receive no Age Pension at all.

Usually, a single homeowner with over $578,250 in deemed assets will not receive any Age Pension from the Government. However, with a Lifetime Annuity, you can reduce the amount of assets that Centrelink deems. Any funds invested into an annuity will only be deemed at 60% of their asset value.

Let’s look at example to show how this strategy could work:

Betty Beaumont is an 83-year-old widower and part Age Pension recipient, who lives alone in her home in Adelaide’s south east at Clarence Park. She owns her home outright and has always lived frugally, only spending what she must to get by.  

Sadly, late last year her husband Frank passed away from bladder cancer. Once his Estate was finally distributed, after a long drawn out probate process, Betty was left approximately $600,000, as a combination of some Telstra shares and the proceeds from the sale of a parcel of land held in Frank’s name.

Upon receiving the shares and cash, Betty calls Centrelink to update her assets, and is surprised to hear that she will no longer receive any Age Pension at all, as she has breached the ‘assets test’ upper limit thresholds. Betty is understandably upset, as she has always valued her pension, and sees it as a fair compensation for a lifetime of hard work with very little superannuation contributions.  

As soon as she receives the news, she calls her financial adviser Adam at Humble Goode Financial. He explains to Betty that she can actually use an annuity strategy to regain her pension, whilst also guaranteeing a more stable income stream, knowing that Betty is inherently conservative by nature.

Adam helps Betty invest $300,000 of her spare cash at bank into a Guaranteed Lifetime Annuity, which will pay her a lifetime income stream of $12,300 p.a. (4.10% return locked in for life), which she is thrilled with.

On top of guaranteeing Betty a stable income stream, Adam has also helped Betty reduce her pension assessability by $120,000 as only 60% ($180,000) of her annuity investment is assessed.  Due to this, Betty will also receive a part Age Pension once again, which means she will maintain access to her seniors healthcare offsets, which reduces her monthly cost of medicines substantially.

If Betty had invested the proceeds from Frank’s estate into a Term deposit, her interest rate would have only been 1.5% and she would have received no Age Pension.

Why not come and see us to learn about how an Annuity could improve your long-term cash flow position. We will go through all your options and see if this strategy is the right fit for you.