A new retirement planning series in The Sydney Morning Herald, The Brisbane Times and WA Today is guiding Australians into the case for lifetime income products such as annuities, which guarantee a regular income for life and are designed to ease the stress of volatile share markets.
Retirement can bring considerable anxiety for Australians leaving employment, even those with significant superannuation balances or large asset portfolios. Questions such as how long retirement will last and whether retirees can maintain their standard of living weigh heavily, according to the six-part Rewriting Retirement series.
Lifetime income products are designed to neutralise those concerns by paying a regular income for the rest of a retiree's life. Annuities, one of the most commonly taken up types, 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," she said.
The tax treatment of annuity income depends on how the product was paid for. If it is funded from superannuation and the retiree is aged 60 or over, payments are completely tax-free, just like super income.
The series notes that lifetime income products can be suitable for retirees in a range of situations, but it is important to do due diligence. It also links to related reporting on how budget tax changes are spelling the end of tried-and-true retirement plans.
Analysis
Why This Matters
- Retirees who draw an income from superannuation carry two risks at once: their balances rise and fall with markets, and they do not know how long their savings must last. Annuities replace both uncertainties with a guaranteed payment.
- The tax treatment gives annuities a clear edge in some cases: payments from annuities funded through super are tax-free for Australians aged 60 and over.
- The series is aimed at a broad audience, including those with significant balances, and signals that certainty, not just growth, is now central to retirement planning.
Background
Australian retirement is built largely on compulsory superannuation, with balances typically invested in shares and other assets, so how much income a retiree can draw depends on market performance and lifespan. Annuities are a long-established insurance product that converts a lump sum into a regular income stream, for life or for a fixed period. The central trade-off is between keeping capital invested, with market risk, and locking in guaranteed income, with less flexibility. The choice also interacts with the tax system and with how the Age Pension means test treats the product. A related article in the series examines how budget tax changes are affecting established retirement strategies.
Key Perspectives
Retirees and those planning retirement: The attraction is peace of mind. Knowing payments will arrive for life, unaffected by markets, removes the stress of tracking portfolio performance and the worry of outliving savings.
Financial advisers: Natalie Scott of HLB Mann Judd argues that an annuity can solve a problem superannuation cannot. With super, portfolio performance decides whether there is enough money until death, whereas a fixed or CPI-linked annuity provides certainty. She describes it as a way of achieving peace of mind.
Skeptics and the cautious: The products are not a universal answer. The series itself notes that due diligence is important and that annuities suit retirees in a range of situations, not all. Money locked into a guaranteed product is not available for other uses and misses out on market gains in good years.
What to Watch
- The remaining instalments of the six-part Rewriting Retirement series, which will cover other questions facing those about to retire.
- The budget tax changes examined in the series' related reporting, which could alter the value of established retirement strategies.
- Whether guidance leans toward fixed annuities or CPI-linked products, both of which the series notes are insulated from market performance.