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The perks of being predictable

Annuities are back in vogue, underpinning Challenger's success

By: Glenda Korporaal
The Weekend Australian

Brian Benari is the managing director of Challenger Limited, an investment management company that has led the revival of annuity products in Australia.

How do you explain an annuity to someone who has no idea what it is?

There's nothing complicated about annuities. Put simply, it's like a pay cheque in retirement. Retirees invest a portion of their retirement savings and, in return, an annuity will pay you an agreed income every month, linked to inflation if you like, either for a fixed term or for the rest of your life. This means you don't have to worry about running out of money.

Challenger is now Australia's largest provider of annuities. How has the market for annuities changed in the past few years and what sort of annuities are people buying?

Every day 700 Australians turn 65 and, as the baby boomer generation moves into retirement, demand for annuities is increasing very rapidly. Annuities are now very much in the mainstream for retirees. In fact the growth in annuities sales has been dramatic. In 2010, 53 lifetime annuities were sold in Australia. Last year that number was over 9000. Retirees are sending a clear message that ensuring secure, predictable income for life is now a top priority.

Some advisers are still reluctant to sell annuities. They say they don't provide return for money. Do they have a point?

There are pockets of people who don't realise the benefits that today's annuities provide. Innovations in recent years mean there is now a range of products available that enable retirees to choose what's most important to them, such as level of income provided, a need to access capital or ensuring a portion of capital is returned to your estate if you don't live as long as expected. Today's annuities can balance these priorities to meet the needs of retirees. As an example, for $100,000 in a flexible lifetime annuity, a 65 year-old male will get $6280 a year for the rest of his life. And the annuity would give 100 per cent of your capital back to your estate if you died in the first nine years. Annuities are a form of insurance.

There are changes to legislation on annuities coming up in July. What impact will they have?

In last year's budget the government announced changes that will allow for a broader range of retirement income products, including deferred lifetime annuities. Legislation on this has progressed and we are expecting it to come into effect from July. This is good news for the ever increasing number of retirees as it will give them more options and more flexibility as they prepare for retirement.

Any personal investment gurus you admire?

Who wouldn't like an investor with a long-term outlook like Warren Buffett? Some of his top tips for investing are to focus on cash and cash flow.

What are your personal investment philosophies?

At times when investing looks easiest and everyone is claiming to be an expert, that's when you need to be most wary!

What was your first or most important investment? Any lessons you have learned on your personal investing side?

It was a modest rental property in Perth which I bought with a small deposit and sold relatively soon after as the market turned. I learned that being able to hold assets during cycles is crucial. Therefore having assets that produce reasonable income and are not encumbered with excessive debt is key.

Challenger is also a big investor - where are you putting your money these days? How does the global market look to you?

Our investment goal is to match our long-term commitments to our annuitants with dependable income from long-term assets. We take a conservative view and invest in assets including government and corporate bonds and other fixed income, as well as other longer-term assets such as infrastructure and properties with long-term leases to tenants including state and federal government.

What sort of mix would you think the average retired person would put into annuities?

It changes depending on the needs of every individual but we find that generally retirees will put about 25 per cent of their savings into an annuity with the remainder of their super invested in other growth assets like equities and infrastructure.
They look to the income from an annuity to pay for essential needs in retirement, like what you need to keep a roof over your head and healthcare costs, while money from the gradual sale of their growth assets goes towards paying for discretionary needs, like holidays or home improvements. It's not a single investment that solves all problems for retirees but a combination of income assets like annuities and growth assets such as shares that work together to achieve the best outcome in retirement.

This article was originally published in The Weekend Australian on 29 April 2017 and is republished with permission.