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There are currently two main types of lifetime income streams: lifetime superannuation pensions, which are purchased from a super fund, and lifetime annuities, which can be purchased either with super funds or with your savings. Once purchased, the payments from these income streams will last for the rest of your life.
How might this impact on your pension?
Your rate of Age Pension is calculated using both an income test and an assets test. The test resulting in the lowest rate will apply.
“Under the social security income test, 60 per cent of any payment that you receive from this type of income stream is assessable as income for social security purposes,” explains Andrew Lowe, Head of Technical Services at Challenger.
“Under the social security assets test, generally 60 per cent of the purchase price will count as an asset through to age 84, or for a minimum of five years. From that point onwards only 30 per cent of the purchase price counts as an asset.”
This is different to many other types of investments, where 100 per cent of the asset is assessable.
Because of these changes, the most likely to benefit, says Lowe, are those who receive a part Age Pension because of the income or assets tests, and who have purchased a lifetime income stream on or after 1 July 2019.
“The impact of this is that if you were getting a reduced Age Pension because of the income test or the assets test, then investing in a different type of structure on or after 1 July 2019 – like a lifetime income stream – could change your Age Pension outcomes,” he explains. “In addition to benefiting from a lifetime income stream, they could actually get an increase in Age Pension as well.”
Ask for help
Always speak with a financial adviser about your personal circumstances before making any financial decisions. In some cases, the difference can be quite significant. While every situation is unique, Lowe offers one example of a client who was able to lift their annual Age Pension entitlement from $15,000 to $19,000 by investing part of their savings in a lifetime annuity.
“That extra $4,000 worth of Age Pension could make a significant difference to the client's income in retirement and how long their retirement assets last,” he says. “So, it's not necessarily a dollar or two here or there. It could be thousands of dollars a year in increased Age Pension that the client could access because of the way they choose to structure their assets.”
How does a lifetime annuity work as a source of income?
Using the income generated from a lifetime annuity to complement other sources of income (such as the Age Pension) is a common approach for retirees, says Lowe. “I would generally see a lifetime annuity complementing other sources of income in retirement. It's rare that I would see 100 per cent of anyone's income provided by one source.”
Here’s how it might work if you used part of your savings to purchase an eligible annuity as your lifetime income stream: together with your financial adviser, you’d work out your total spending requirements once you retire, including both essential and discretionary spending. “Then we work out where that number sits relative to the maximum rate of Age Pension,” Lowe says.
“Let’s take a couple who are eligible for the maximum rate of Age Pension – about $36,000. If they can get by on $36,000, they might not need another layer of income. But if they worked out that their essential spending was more than $36,000 – say it’s $40 grand – then they could buy four grands worth of additional income a year to get them up to $40,000 through a lifetime annuity to cover their basic living costs for life.”
Because an annuity provides a fixed or increasing lifetime payment, you have the peace of mind that comes with knowing your income will be stable for the rest of your life – no matter how long that is. This is particularly valuable when you want certainty of income without some of the risks associated with other types of market-linked investments.
As Lowe sums up: “Essentially, it's allocating resources to buy a very secure lifetime income stream, that sits on top of the maximum rate of Age Pension you are eligible for, meaning that no matter what happens, you can always afford what you need through your retirement.”
If you'd like to find out more about how to look forward with confidence in retirement, download A guide to a confident retirement.
This article first appeared on www.msn.com