About annuities

Five surprising facts about annuities

Annuities have been around for a very long time. In fact they go back as far as the Roman Empire. In more recent times, annuities have evolved to be more suitable for modern day needs. 

In its most basic form, an annuity is a secure financial product that provides a series of regular payments in return for a lump-sum investment. 

Here are five surprising facts about annuities.

1. Annuities are flexible

There's now a range of annuities available that allow retirees to choose the benefits most important to them. It's possible to choose the frequency of payments, the level of inflation protection and even the amount of capital that can be accessed at certain times over the life of the annuity. Most annuities also offer options for leaving part or all of the annuity payments or a lump sum to your loved ones or estate after you pass away. 

2. Regular payments that last a lifetime 

Australians are living longer due to advances in medicine and healthcare. This means retirement is lasting longer than ever, and for some people this could mean up to 30 years or more living off your savings! Lifetime annuities payments are guaranteed to be paid for as long as you live, irrespective of investment markets. . 

Lifetime annuities guarantee a level of income for life, even if you live longer than expected. 

3. Annuities are not an invest all or nothing type of product  

Annuities typically only form a small part of a larger retirement plan, which usually includes an account-based pension. 

An annuity is typically the guaranteed income component in your retirement plan, as it's protected from share market and interest rate movements. It works alongside the Age Pension (if you're eligible for it) to guarantee regular income for essential needs like food, clothing and housing. With these essentials taken care of, you can have more flexibility with how you manage your account-based pension and other market-linked investments for discretionary spending like holidays and entertainment. 

4. Annuities pay competitive earning rates 

When long-term annuity rates are calculated, potential future interest rate rises are already priced in. As Chart 1 reveals, over time, this means annuities provide a better return than government bonds and term deposits.

Chart 1: Yields on various Australian term instruments in September 2017


Source: RBA, Challenger 

But an annuity isn't all about the rate it pays. Annuities are never going to provide the highest returns - they form part of the defensive assets in a retirement portfolio which guarantees you income no matter what is happening in the market. 

5. Annuities are strictly regulated, meaning your money is protected 

When you buy an annuity, your money goes into a statutory fund with money from other investors. Your guaranteed regular payments are made from this fund.

Annuity providers are strictly regulated by the Australian Prudential Regulation Authority (APRA) and required to hold a minimum level of capital in this statutory fund. 

There are strict policies and plans in place to make sure the capital in the statutory fund stays above the APRA-required amount, so current and future payments can always be met. 

Although annuities have been around for a long time, these secure financial products, continue to evolve and today provide the flexibility to meet the changing needs of today's retiree who now want choice and guaranteed income for life.

To find out more about annuities, speak with your financial adviser or call Challenger on 13 35 66.