Term annuities: delivering peace of mind

A term annuity provides a regular cash flow for a chosen investment term, regardless of how investment markets perform. Whether used on its own or with other investments like account-based pensions, it can give clients peace of mind during retirement.

Clients can generally choose investment terms of between one and fifty years. Regular payments last for the chosen investment term, unless a client chooses to withdraw their money early. Clients can choose to have all of their capital repaid to them at the end of the investment term, or can choose to have some or all of their capital repaid to them as part of their regular payments throughout the investment term.

Term annuity payments can be fixed for the entire investment term or clients can choose to have their regular payments increased annually, either in line with increases in the consumer price index (CPI) or a fixed whole percentage rate of up to 5 per cent.

Benefits of a term annuity include:

  • Regular payments in return for a lump-sum investment
  • Competitive earning rates fixed at the start of the investment
  • Generally tax-free payments for those clients aged 60 or over if bought with superannuation money
  • Can be tailored to provide benefits for your client’s spouse or another dependant
  • Can help increase Centrelink entitlements
  • Can help a retiree client meet the Commonwealth Seniors Health Card (CSHC) income test requirements.

Financial planning applications of term annuities

There are a broad range of financial planning applications of term annuities – from use as a straight substitute for fixed term or fixed interest alternatives (as a term deposit substitute for example) through to use of the annuity structure for the other technical benefits or structuring benefits it provides.

Funding income for those clients who have ceased work prior to Age Pension age or taking some time out of the workforce can be an involved process requiring a careful balance of the client's expectations and objectives with income from their investments and other sources (including Social Security in certain circumstances).

A fixed term annuity can provide a client who has ceased employment:

  • A guaranteed level of income that will last for their chosen term, which could ideally be matched to the client attaining Age Pension age or their planned period out of the work force
  • An increased level of income certainty to help meet living and other expenses
  • A regular income stream that can supplement a client’s Newstart Allowance or other Social Security benefits (if applicable)
  • Flexibility to invest other assets (both inside and outside super) with a focus on growth rather than having to rely on these other assets to provide income to meet living and other expenses.

A fixed term annuity could also assist an SMSF to meet its cash flow requirements by providing a secure and regular source of income for an initial period of time, and further such annuities could be used to provide subsequent cash flows.

Funding SMSF cash flows with a fixed term annuity can provide:

  • A simple framework to help SMSF trustees manage their investment mix in retirement
  • An increased level of certainty to help meet pension payments and fund expenses
  • Flexibility to invest other fund assets in growth assets for the longer term, knowing that the cash flow requirements of the fund have been satisfied.

A term annuity could also provide another source of secure, regular income for clients who experience a reduction in Age Pension entitlement as a result of the 2017 asset test changes.

Source: Challenger

IOOF and short-term guaranteed annuities

From June 2016, short-term guaranteed annuities are available on Pursuit Select.

More information on these changes is available here, or please contact your local IOOF BDM or call our Adviser Services Teams on 1800 659 634.

The information contained in this newsletter is provided on behalf of the IOOF group of companies and is intended for financial adviser use only. It is given in good faith and has been prepared based on information that is believed to be accurate and reliable at the time of publication. Any examples are for illustration purposes only and are based on the continuance of present laws and our interpretation of them at the time.