Clarity needed on deferred annuities
Despite extensive coverage of the government's proposed changes to superannuation, they are not likely to be legislated before the federal election in September.
Among the government's proposals likely to be considered favourably by the Coalition, should it win power, is the one to give "deferred lifetime annuities" the same tax concessions as other superannuation assets. That should interest anyone worried about outliving their retirement savings.
Deferred lifetime annuities are longevity insurance. Someone uses a portion of their super savings to buy the annuity. The annuity starts paying an income only once the purchaser reaches a certain age. It keeps paying the fixed income, probably adjusted for inflation, until the purchaser dies.
Those who die early lose out and those that live longer, win.
Annuities provide retirees with peace of mind that if they run down their superannuation savings, they will have the annuity kick-in and have more than the age pension to fall-back on. As it provides a fixed income, the purchaser escapes the vagaries of investment markets. Financial institutions do not provide deferred annuities. That's because deferred annuities would be taxed as if they are generating income from the purchase date, rather than from the deferred period. If the proposal to tax them more favourably and treat them like any other superannuation asset becomes law, insurers will start offering them.
In a recent research note, JP Morgan said a deferred annuity providing an income of $25,000 a year in today's dollars could cost about $40,000 for a 65-year-old looking to commence drawing-down income at age 85.
Those wanting to buy a deferred annuity would have to shop around. Insurers would likely provide a quote that is good for a week or so. That is because there are many variables in their pricing. These include the age of the person when they buy the annuity, the age at which the deferred annuity starts paying income and their gender and life expectancy. Interest rates and outlook for interest rates also play a role in pricing. Another important part of any decision to buy an annuity is trust in the institution standing behind the annuity. Insurers are well-regulated and have to meet minimum capital-adequacy requirements. But an annuity may not start paying an income for 20 years. Changes in the financial services industry over that time are likely, including merger and acquisitions among annuity providers. Superannuation rules will change. Maybe the product is no longer sold by the insurer.
Do you want to be left at age 85 holding one of the insurer's "legacy" products?
As JP Morgan points out, there are a number of reasons why retirees could decide they can do without deferred annuities. They include that once a deferred annuity is bought, the money used to buy the annuity will not be passed on to children in the event of an early death. However, in a competitive market, deferred annuities that pay a death benefit could be offered.