Previous generations saw retirement as being a few easy years of comfort after a life of hard work.

In the 21st century, things are so different that we really need a new term for the period of life after full-time work. Now we’re not just living longer, but thanks to amazing medical and social advances, living better.

Many people don’t see retirement as an end, but a beginning – an opportunity to learn new things, visit new places, take up new activities and enjoy life to the full. It’s an exciting time. However with this new opportunity comes an age-old challenge. How are we going to pay for it?

The introduction of compulsory superannuation in 1992 has helped Australians save for their retirement but building up funds for retirement is only half the battle. Making those funds last throughout retirement is just as important.
Average life expectancy is increasing every year. Australian Bureau of Statistics* figures show that over the past 20 years, the number of people aged 100 years or over increased by 185% (compared to a total population growth of 30.9%). On this basis, If you’re 65 today, there’s a good chance you’ll live well into your 90s, so the decisions you make about investing your retirement funds are critical for ensuring your money lives as long as you do.

Growing assets versus protecting assets

During our working lives, when we’re building up our superannuation, most people can afford to take some risks in order to maximise gains over the long term. For example, if you want to retire in 20 years or more and you do not need access to your super, you can probably weather a market correction.

However, for retirees who require a regular income from their superannuation funds, exposure to market corrections can have a very adverse impact. As people reach retirement, protecting their assets and preserving their savings become much more important.

What is an annuity?

An annuity is a simple, secure financial product that guarantees a series of payments, for a fixed term or for life, in return for an upfront investment. The capital can be returned at the end of the agreed term or gradually during the term of the annuity in the form of income payments.

The rate of return is fixed at the outset, and this applies for the length of the annuity, regardless of share market movements or interest rate fluctuations.

Annuities provide the comfort of a pre agreed, guaranteed income stream for a specific period of time or for life.
Annuities can only be issued by life insurance companies. In Australia they are strictly regulated by the Australian Prudential Regulation Authority (APRA), which also oversees our banks and superannuation funds.
Annuities are extremely popular, with $9.5 billion invested in Australian annuities as at 30 September 2010 according to Plan for Life Actuaries and Researchers.

Features of an annuity

Annuities have a number of features that can be tailored to suit different needs. The main features are as follows:

Term
‘Term’ refers to the length of an annuity policy. Fixed term annuities are generally available for fixed terms of between one and 50 years. The investor selects the term most appropriate to them.
The term of a lifetime annuity is the rest of the investor’s life – income payments continue until they die.

Earnings rates
The earnings rate (or rate) refers to the interest paid by a fixed term annuity. For example, an investor taking out a $100,000 three year annuity, offering a rate of 6.46% p.a. and annual income payments, would receive interest of $6,460 each year**.

Payments
Payments can generally be made monthly, quarterly, half-yearly or annually. The amount of income paid can be fixed at the outset, indexed by a set percentage or indexed to inflation. For a lifetime annuity payments must be indexed to inflation. Indexing against the impact of inflation may be particularly relevant for long-term annuities as it provides protection against increases to the cost of living.

Depending on the type of annuity income, there may also be a lump sum available if you decide not to draw on the initial capital you invest!

Some of the benefits of annuities include guaranteed lifetime income and capital, attractive returns, protection against inflation, tax effectiveness (tax free if you are over 60 and using superannuation monies).

However, you will need to consider whether you are comfortable with locking up a portion of your funds for an extended period of time.

Contact your Wealthwise adviser for more information on annuities by calling (08) 9380 6333.

* Australian Bureau of Statistics, Population by Age and Sex, Australian States and Territories, June 2010.
** Based on the rate of a RCV100 Challenger Guaranteed Annuity as at 28 February 2011.
Challenger booklet – Understanding annuities Secure your future with a safe, reliable income stream.

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