Debunking myths of lifetime annuities

An important benefit of a lifetime income stream, such as a lifetime annuity, in a portfolio is that it can help address the issue of longevity risk. Annuities have evolved and changed over the years making them quite different to what they used to be. Whilst they still pay income for life, today’s lifetime annuities have many different features that can make them a lot more flexible than what they used to be. 

This article addresses some common concerns and misconceptions of lifetime annuities amongst clients and demonstrates the benefits that an allocation to a lifetime annuity can bring to clients. 

Lifetime annuities referred to in this article are Challenger’s Lifetime Annuity (Liquid Lifetime) and additional information on the product can be found in the Product Disclosure Statement. 

If my circumstances change or if I die early, I am unable to access my capital and it is lost 

Unlike traditional annuities, modern day annuities can provide a withdrawal/death benefit for a long period of time after commencement. Challenger’s Liquid Lifetime Annuity offers a long withdrawal period based on the investor’s life expectancy where there is an ability to withdraw if circumstances change or a death benefit payable in the event the investor passes away. The withdrawal period is equal to the investor’s life expectancy rounded down to the whole number and capped at 27 years. For lifetime annuities commenced from 1 January 2020 the Australian Life Tables 2015-2017 is used to determine life expectancy. 

The introduction of the Capital Access Schedule (CAS) within the Innovative Superannuation Income Streams Regulations in 2019, enables a lifetime income stream to provide a 100% death benefit¹ to the estate of anyone who dies within the first half of their ‘life expectancy’ (this ‘life expectancy’ is based on historical data and ignores mortality improvements over time). Consistent with the government’s rules for Innovative Superannuation Income Streams, Challenger’s lifetime annuity provides a 100% death benefit during the first half of the withdrawal period (rounded down to the whole number).

For a typical retiree at age 65, the 100% death benefit period will be 9 years for a male and 11 years for females. During the second half of the withdrawal period, a reducing death benefit is payable until it reduces to nil at the end of the withdrawal period. The investor also has the ability to withdraw during the withdrawal period. The maximum withdrawal value starts at 100% of the amount invested and progressively reduces until it reaches zero at the end of the withdrawal period. The actual withdrawal value is impacted by movements in interest rates and an allowance for the cost of breaking the investment. For more information on how the voluntary withdrawal value is calculated refer to the Product Disclosure Statement. 

The chart below provides an illustrative example of the withdrawal period, death and withdrawal values for an investor who is age 65, female and has invested in a lifetime annuity that pays regular income immediately (not deferred) that is indexed to CPI. 

Flexible Income (Immediate payments) illustration 

This example is based on a 65-year-old female with CPI-indexed payments. For a personalised illustration, you can run a quote on Adviser Online or by calling us.

Related content