Secure, tax-friendly annuities popular retiree investment
ASX-listed Challenger Ltd's annuities business is proving popular with retirees.
Challenger reported that its life annuity sales for the September quarter were $732 million, an increase of 31 per cent on the same quarter last year. The growth is right across the board, whether fixed term or lifetime annuities.
The products are striking a chord with retirees who reckon they are going to be around for a long time. With increasing longevity, it is not hard to see the appeal of using a small part of the retirement nest egg to take some insurance against the fluctuations of investment markets, particularly sharemarkets. Annuities are like term deposits, but with much greater flexibility.
Investors hand over their capital and, in exchange, receive a fixed rate of interest for the term of the annuity. With term deposits, the original capital is returned to the investor at the end of the term.
With annuities, investors can specify whether they want all of their capital back at the end of the term, part of their capital back or none back.
The most popular annuity term is three years, with a 100 per cent return of capital at the end of the term, says Challenger's general manager of corporate marketing and communications, Stuart Barton.
More than 80 per cent of these investors reinvest at the end of the term, often for another term of similar length, he says.
Investors can earn better interest rates than most three-year term deposits, while receiving the tax benefits of superannuation, as annuities are treated as superannuation assets.
A term deposit receives the superannuation tax breaks if it is held in a self-managed superannuation fund or is accessed through a superannuation fund, which more funds are offering.
Challenger's lifetime annuities are selling at record levels, Barton says. Challenger's Liquid Life annuity, which runs until the death of the investor, allows for some of the capital to be returned within the first 15 years of the annuity. And the annuity can have a reversionary option where a "second life" can be added to the annuity contract. A couple can be reversionary to each other so that the surviving spouse receives the payments.
An annuity is a life-insurance product and life insurers, like banks, are regulated by the Australian Prudential Regulation Authority. But term deposit investors do have the benefit of the government's deposit guarantee on the first $250,000 of capital.
Life office annuities are the next most secure after cash deposits, Barton says.
There are other annuity providers besides Challenger, such as CommInsure.
That means investors or, more likely, their financial planners, need to shop around with insurers and obtain some quotes.
Another important factor that needs to be considered is the effect the annuity will have on social-security benefits. Independent financial advice is needed.
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