Protection For Your Retirement Income

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’ 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 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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Securing your family’s future

Estate planning is something many of us put off until later … but tackling the issue now can smooth the way for your family and protect your own interests.

When you have a family, the focus of your concerns tends to shift from yourself to providing for them. Whatever life stage you’re at right now, to create long term security for both yourself and your family, you need to consider several

Making a will

If you are aged 18 or over and of sound mind, it may be prudent to make a will. Don’t be tempted to put it off, because if the worst happens and you die intestate (without a will) your assets will be distributed according to the laws of the State or territory in which you lived at the time of your death, which may not match your wishes.

Writing a will doesn’t have to be difficult or complicated. Before you start, work with your Wealthwise financial adviser, in conjunction with your legal or tax adviser, to ensure that your assets and investments are appropriately structured, particularly with regard to potential stamp duty and Capital Gains Tax.

When you’re writing a will, carefully consider any family dynamics. Could your will make existing tensions worse? Are you providing for the best interests of everyone concerned? Should you consider a testamentary trust to control how beneficiaries will receive their inheritance1? A trust may be relevant if you need to provide a regular income for young children, dependants with an intellectual disability or anyone who may not be able to manage money.

Remember also that any will you have already made will generally be revoked when you get married, so it is essential that you write a new will whenever your circumstances change, including:

  • marriage or divorce (including de facto relationships and separation)
  • birth or adoption of a child
  • purchase of a home or any other substantial investment
  • death of a beneficiary in your will (eg partner, child, relative or friend).

What’s not covered by a will

Most of your assets, including possessions, property, money in bank accounts and investments, will become part of your estate once you’re deceased and will therefore be governed by the terms of your will.
Securing your family’s future

But there are a number of assets that aren’t covered by your will, such as:

  • assets owned as a joint tenant (your share will go to the joint tenant)
  • assets owned by a company or held in a trust superannuation death benefits or life insurance
  • proceeds that are paid directly to a beneficiary rather than to your estate

If you have life insurance outside of super, you can usually nominate a beneficiary and any payout will go directly to that beneficiary (or beneficiaries) rather than to your estate.

Don’t forget to take this into account when you are planning your estate.

What about you?

You may also want to consider a Power of Attorney (PoA) if you believe you may become unable to manage your own affairs.

This allows someone to act legally on your behalf. A PoA is only valid during your life. When you die, your will and executor step in. Another option is appointing an ‘enduring guardian’, who can make personal decisions on your behalf such as where you should live and what medical treatment you should receive.

The legislation, types of PoAs and guardianship powers vary in each State and territory so it would be prudent to seek legal advice to ensure you structure them in a manner that is most appropriate to your situation.

Financial Wisdom Limited Insights newsletter May/June 2011
1 A testamentary trust is a trust established by someone’s will. It comes into existence only when that person dies. Including a testamentary trust in your will can be useful for making tax effective distributions to beneficiaries under 18, caring for children or a dependant who is incapacitated, and preventing beneficiaries from inappropriately spending their inheritance.

Drafted a plan to suit our needs

We were recommended to talk with Jamie Luxton in 1996 by our accountant as she felt he would have more expertise to help with our financial planning.

Jamie drafted a plan to suit our needs which we went along with. This was followed up with visits 2-4 times a year to advise of updates and make any necessary adjustments to investments. Besides these meetings, we were invited to seminars put on by Wealthwise to keep their clients informed as to what was happening in the market and to various tax savings strategies that arose out of tax changes in relation to investments and superannuation.

After some previous bad advice in the 80’s, we tried a bit of investment on our own with little success. However, we soon built up a trust with Jamie as we found him to be honest, and his patience and clarity in explaining the workings of various strategies was appreciated. We also appreciated the speed in which he attended to our needs and some problems we encountered.

More importantly, we learnt to ride out the downturns in the share market (including 9/11) and keep focused on the long term and believe in the statistics that whenever there has been a downturn in the sharemarket it has always risen above the previous high.

More recently, he had helped us with regards to allocated pensions, superannuation and retirement planning, His recommendations have allowed us to save a considerable amount of tax and to build an effective nest egg for our eventual retirement.

Greg and Barbara Barnett, clients since 1996