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Four things clients get wrong about lifetime annuities

For financial adviser use only

In this article we get to the bottom of four things clients sometimes get wrong about lifetime annuities, and why they shouldn’t be overlooked as a crucial part of your clients’ retirement income portfolio.  

Client concern one: Lifetime annuities are only good value in a high interest rate environment

Waiting for rates to rise before investing in a lifetime annuity could disadvantage clients over the long term. By keeping their defensive portfolio allocation in lower-yielding assets like cash, your clients may lose out in the short term. 

Most clients don’t know that lifetime annuity payments are priced with reference to long-term interest rates, which are higher than current short-term interest rates. By investing in a lifetime annuity, clients get access to these higher long-term rates from day one.

For clients who are concerned about missing out on potential interest rate rises, we’ve designed the Challenger Liquid Lifetime RBA cash linked option, Australia’s first floating rate lifetime annuity. This gives clients the option to link their lifetime annuity payments to movements in the RBA cash rate (whether it be an increase or decrease). So their payments will increase as the cash rate increases. 

Even in a low interest rate environment, a lifetime annuity can offer clients a range of other benefits:

  • Guaranteed income for life to help cover essential living expenses - as part of a comprehensive retirement portfolio, a lifetime annuity creates a level of cash flow certainty via regular, guaranteed payments that last for life. A well-structured income layering strategy can help put clients in a better position to cover their basic spending needs - however long they live, and however markets perform.
  • An effective way to stay invested for the long term - the confidence that comes from having guaranteed income can help clients feel more comfortable with some exposure to higher risk growth assets in their portfolio and encourage them not to be too conservative with their retirement spending.
  • Strategic benefits other defensive assets cannot deliver - compared with other defensive assets, lifetime annuities can offer strategic benefits, such as opportunities to improve Age Pension outcomes and the option of linking payments to inflation. 
Client concern two: My money will be ‘locked away’ with a lifetime annuity

Lifetime annuities are a long-term investment option designed to provide guaranteed income for your clients’ lifetime. But they can be structured to include withdrawal and death benefits if needed.

The Challenger Liquid Lifetime annuity offers flexibility by including a long withdrawal period based on your clients’ life expectancy. During this period, clients can access a lump sum amount from their annuity, if their circumstances change. The amount they receive will be subject to changes in interest rates*. 

The Challenger Liquid Lifetime annuity also includes an option that pays a guaranteed death benefit to your client’s nominated beneficiaries or to their estate if they pass away*. We calculate this benefit as 100% of the amount invested if they pass in the first half of the withdrawal period, based on their life expectancy. After this time, the benefit will be equal to the maximum withdrawal amount until life expectancy**. 
With a combination of a lifetime annuity and other retirement assets (including those held via an account-based pension), your clients can actually increase their total accessible capital and optimise their estate planning outcomes. You can model these outcomes using the Challenger Retirement Illustrator available via AdviserOnline.
Client concern three: An investment in a lifetime annuity could mean missing out on exposure to growth during a recovery
A lifetime annuity is often used as substitute for other defensive assets and it won’t change your client’s exposure to growth assets, as the allocation is maintained at a total portfolio level. However, you may want to consider reviewing portfolio weightings and allocation to growth assets for your client, depending on their goals and risk profile.  

Client concern four: A lifetime annuity is no more secure than any other fixed interest investment

Challenger annuities are secure and guaranteed by Challenger Life, which is regulated by the Australian Prudential Regulation Authority (APRA). 

As part of our obligations, we’re required to hold enough capital to ensure we can still pay clients in the event of significant market volatility. In fact, we aim to hold between 1.3 times and 1.6 times APRA’s minimum requirement. And while recent market changes have impacted the amount of capital we hold, we’ve still kept within this range. 

When a client invests in an annuity with Challenger, their money is placed into a secure fund, along with money received from other annuity clients. Challenger also contributes money into this fund, which is known as the statutory fund.

Clients who choose to invest with Challenger can rest assured they are protected by a lifelong guarantee that isn’t impacted by market movements and changes in our share price.

To see how annuities can help your clients meet their retirement goals, log into AdviserOnline to try our Retirement Illustrator and Age Pension Illustrator modelling tools or contact your Challenger BDM.


*Your client can ask us to change these features in return for different starting payments. But the choice is totally theirs.
**The regular income option has a 15-year withdrawal period and death period.