When you retire, there are different financial factors to consider because you are no longer receiving income from employment.

Adverse market movements can have a greater impact on your savings in retirement because you’re not replenishing your savings with a regular pay cheque. Additionally, when you’re employed your income generally increases to keep pace with inflation. However, in retirement, inflation can erode the purchasing power of your savings.

At the same time, thanks to medical advancements and healthier lifestyles, you could enjoy a retirement period upwards of 30 years. This is a long time to make your savings last. Therefore, the decisions you make about investing your retirement funds are critical for making sure those funds last as long as you do.

Fortunately, there is a way to guarantee a level of secure, regular income throughout your retirement. An annuity pays you a guaranteed secure income that can keep pace with inflation, if you choose. The income is generally tax free if you’re over 60 and investing your superannuation money. Some annuities may also help you access or increase your seniors benefits like the age pension and the Commonwealth Seniors Health Card.

An annuity is a secure investment that provides you with a series of regular payments, either for a chosen term or for your lifetime, in return for a lump-sum investment. It can be used with other retirement investments, like account-based pensions, to set you up with a dependable income that can last throughout your retirement.

Term annuities have fixed start and end dates that are typically chosen by you. The minimum term is one year and maximum term is 50 years. Annuity payments are for the duration of the term and stop at the end of the term.

Lifetime annuities provide regular payments for the rest of your life. If you choose, the payments may continue for the lifetime of a second person after you pass away. Lifetime annuities can help alleviate the worry that you will outlive your retirement savings.

An annuity works like a pay cheque in retirement. You invest some of your savings with a financial institution who then holds your money while paying you guaranteed regular payments. This income is generally tax free if you are over 60 years of age and are investing your superannuation money. The payments can be made monthly, quarterly, half yearly or yearly.

It is important to note that annuities are designed to be held to term. If you would like to withdraw your annuity, in most cases you will receive a return of your investment but you may receive back less than you invested originally and less than you would have received had you held the annuity for its agreed term.

To find out more about how an annuity can help you in retirement, speak to your Leenane Templeton financial planner on 02 4926 2300

Source: Challenger

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Retirement is a life-changing event. After you stop working, you can find yourself with time to do the things you may not have been able to do before, like travelling, volunteering or spending more time with family and friends so making the most of your retirement income is essential.

As you adjust to this new lifestyle, you'll also need to think differently about your finances. In retirement, your priority typically changes from saving, in preparation for when you leave the workforce, to carefully spending those hard-earned savings. It's likely that your initial focus will be to find a way to replace your salary or wage with cash flow from other sources.

The composition of your retirement income requires careful planning. Your retirement income may come from more than one source.

Age Pension

The Age Pension is an income support payment offered by the Government to older Australians who meet the relevant eligibility criteria. 

With maximum payments of $21,912.80 p.a. for a single pensioner and $33,035.60 p.a. for pensioner couples (including the Pension and Clean Energy Supplement and current for the period 20 March 2014 to 19 September 2014), the Age Pension probably won't be enough to afford most people a modest post-work lifestyle of basic activities, let alone a comfortable lifestyle.

To afford even a modest lifestyle in retirement, many people will need to supplement the Age Pension with other income. This could come from an annuity, an account-based pension or other investments.

An annuity (from within or outside super)

An annuity is a simple, secure financial product that guarantees a series of payments, for a fixed term or for life, in return for an upfront investment. The earning rate is fixed at the outset, and this applies for the length of the annuity, regardless of share market movements or interest rate fluctuations. Capital can be returned at the end of the agreed term or gradually during the term of the annuity as part of the regular payments.

An account-based pension (from your super)

An account-based pension is an investment account which gives you the ability to choose from a range of investments and can vary from time to time with the level of income you wish to draw subject to the minimum annual withdrawal amounts set by the Government. Account-based pensions are usually market linked. This means that the capital value is linked to the performance of the underlying investments, which can impact the level and duration of your savings and the income produced. Account-based pension providers, which may include your super fund, charge management and/or administration fees for these products. This reduces your investment returns.

Other investments

These are just some of the types of investments that can sit within your super fund (personal or self-managed superannuation fund) or outside superannuation.

• Term deposits are fixed term, fixed interest savings account. Terms generally range from one month to five years.
• Shares pay income in the form of dividends. You can invest in shares directly or via managed funds.
• An investment property is real estate which has been purchased with the intention of earning a return on the investment, either through rent, the future resale of the property, or both. Another type of property investment is a property trust, which is a managed fund that enables investors to pool their money to purchase an interest in a portfolio of real estate assets.

Income from various sources can be 'layered' to meet your income requirements. This can be set up so that more secure income, such as from the Age Pension or an annuity, can cover your essential costs of living, while your income from other sources can fund your discretionary spending.

This approach can also allow your more growth-oriented assets to remain invested, giving them time to grow.

Source: Challenger, May 2014

Disclaimer

Since each person is different, there is no single retirement income solution. More than one investment strategy and product may be required so it's important you receive professional help from your financial planner. It can make all the difference to your financial success in retirement.

Please call our email our expert team today!

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The word annuity itself originates from the meaning ‘annual’ and can by definition, be described as ‘a yearly allowance’. To explain them in plain English is as a ‘really long term deposit, one where it is known exactly what the interest rate will be all the way along and when the payments will stop’.

Although many people may immediately think an annuity is locked away forever, that’s not always necessarily true. Like a term deposit an annuity can actually be cashed in before the term expires (even the lifetime ones in some cases). This may not always be the best course of action but don’t immediately disregard annuities if this is your main concern.

So, why have an annuity within a portfolio? If you have read this far, stay with us as they do make a lot of sense when used appropriately.

Annuities play an important role in cash flow management, and provide much needed certainty when stock markets are volatile and it seems like the rest of the portfolio is heading south.
They can also be used for different terms – from one year up to the day when we meet our Maker. Annuities can be set up to pay 100% of the amount invested back when the term is over, or just some of it (if that meets a specific objective).

Let’s look at a simple example:

Vicky is 62, retired, and knows she needs $35,000 to meet her annual income requirements. What she also knows is of that amount, $10,000 is enough for her basic ‘fixed’ costs – all the main bills, etc. The rest is her ‘lifestyle’ money. Her financial adviser recommends that she purchase an annuity to pay for these fixed costs.

The income is fixed, and (like the bills!) can be indexed to inflation. Vicky will then have the certainty that over her lifetime the annuity will always be there to pay the bills she has to pay – no matter what investment markets do, or even what the politicians decide to change. Her other everyday costs are covered by her pensions: the Age Pension and Account Based Pension from her super. All have a purpose and provide her with peace of mind, but perhaps none more so than the annuity. Saying that, the annuity is not going to grow 20% in value in any given year, but that’s not what it’s designed to do (it’s also not going to drop 20% either!).

What about SMSFs?

Annuities can also be used in Self-Managed Super Funds.

A strategy here can be to set aside say three years of annual pension payments, while the rest of the portfolio provides the growth component.
Vicky’s case study illustrates a very simple concept. There are however many ways to use an annuity in a financial plan – too many to go into detail here. The tax and Centrelink treatment is also complicated, but if the idea behind an annuity appeals, then contact your financial planner to find out how one might fit into your retirement income strategy.

Call 02 4926 2300 or email success@leenanetempleton.com.au

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