August 2019 Newsletter
Are lifetime annuities a good idea?
Dear Clients and Friends,
This month we take a deeper look into lifetime annuities – are they are a good idea?
A 71 year old female client recently asked me “What if I live to 100? Is there a way for me to always have enough money, even if I go to age 100 or beyond?”
The answer is yes and the product is called a lifetime annuity that is CPI (inflation) adjusted.
This is especially so for those on a part pension, as, for example, a $150,000 annuity immediately increases the aged pension by up to $180 a fortnight if you are on a part-pension.
In other words, a lifetime annuity sounds like a great idea, especially as one of the conditions of the annuity is that if you die within half your life expectancy, i.e. for the 71 year old women if you pass away within 8 years, you get your entire investment back or at least your estate does.
However, the amount paid by the annuity is quite small at only $6,724 per year after fees, so I did some modelling and the results are very interesting.
The table below shows the interest rate received, depending on how long the 71 year old woman lives:
If you look at the table above, a lifetime annuity only makes sense if you pass away quickly (here within 8 years) or live a long time.
A critical part of the benefit of a lifetime annuity is the extra Centrelink aged pension payments but they only go to those who are on a part pension. Most people either have too many assets and therefore would get little or no extra aged pension or they are already getting most or all of a full aged pension and then there is little or no extra benefit from Centrelink.
If you ignore the Centrelink benefit, then a lifetime annuity makes little sense as you receive a bad return on your investments if you live around your life expectancy – which is after all the most likely outcome. Only if you live well past age 100 do you get a moderately decent return.
If you include the Centrelink boost and if your situation is such that you can expect to receive that Centrelink boost throughout, then an annuity looks better, provided you beat your life expectancy by five years or more.
As you can see, at times financial advice is quite complex and different for each person. In this case you would need your situation looked at individually to see if such an annuity makes sense as there are lots of nuances to consider, including the impact on the aged pension income test.
One good example for a lifetime annuity would be a very healthy person whose parents lived a long time and who receives a very small aged pension or is just above the threshold of receiving an aged pension.
There is a particular aspect of lifetime annuities where exact income percentages are less important: Lifetime annuities pay even if you live to age 100, 105 or even 110. If you live that long, then lifetime annuities are a bargain, but none of our clients have made it over 98 yet!
One can maximise this benefit of lifetime annuities by purchasing a deferred lifetime annuity. In that case we buy the annuity now but specify the annuity won’t start paying for 5, 10, 15 or even more years. The amounts paid are then substantially higher and such an annuity makes sense if you want to cover for very old age.
Below is a table of the different payments, ignoring any Centrelink benefits. One benefit is that Centrelink will immediately reduce your assets by 40% of the annuity paid even for a deferred annuity. In other words, a $150,000 deferred annuity leads to up to $180 extra in fortnightly Centrelink payments if you are on a sufficiently small part pension.
As always, feel free to contact me at any time if you have any questions or wish to discuss this or any other matter.
AFP LRS Adv. Dip.FS (FP) EPA Acc. MBiostats
Life Risk Specialist
SMSF Specialist Advisor
Accredited Aged Care Professional
Accredited Estate Planning Professional
Appointed Rep 308223 – Credit Rep 402866