Buying Annuities in Australia
Annuities are the best option for people who are not okay with risky investments. Annuities also act as a safety measure in case the usual income stream is cut short by unforeseeable circumstances.
What are Annuities?
An annuity is a product that can provide you with a pension for a fixed-term or the rest of your life. This works by making lump-sum payments toward the annuity in exchange for receiving smaller income portions for a set period.
Unlike other similar income streams, annuities give a guaranteed income, regardless of the current market’s performance.
You can either use your super or your savings to purchase an annuity. When buying an annuity, you’ll be asked whether you want it to last for:
- Your lifetime
- A fixed number of years
- Your life expectancy
It’s up to you when and how much you want to receive from the annuity. You can choose to be paid monthly, quarterly, semi-annually, or annually. The annuity income may increase annually based on a fixed percentage or relative to the inflation rate.
You can apply for either an individual or joint annuity.
Couples often go for joint annuity accounts to save on taxes. Joint accounts also give the survivor access to the funds in case their partner passes away.
Pros and Cons of Annuities
As with all investments, annuities have their benefits and downsides.
- Guaranteed payments
Once you’ve paid the annuity, you’re guaranteed to receive payments no matter what happens. Even if the market crashes, you’re entitled to receive what you paid for. This makes annuities a reliable and stable income source.
- Zero risk
It’s possible to outlive both super and account-based pensions. You may be left broke when this happens, and that’s not a good thing if you’re retired and your only income is your pension.
An annuity has zero risks of running out. If you apply for a lifetime payment, you’ll get it without ifs or buts.
- Conservative alternative
If you’re risk-averse, you’ll probably avoid putting your money in the stock market or even in less risky investments like ETFs.
Annuities pose no risk that you’ll receive less money than the agreed amount. Additionally, the amount you receive may increase annually, depending on the annuity terms.
- Tax savings
If you purchase an annuity using your super money, you can receive tax-free payments when you reach the age of 60.
- Inflexibility on withdrawals
Annuity providers usually don’t allow lump-sum withdrawals, unlike other investment products. This can be a problem when you need a large sum of money for unexpected expenses.
In case you cancel your annuity, you may not get the full amount you deposited into it.
- No control over investments
You have no control over how the money you put into an annuity is invested. This means you can miss on investments that would have given you larger returns.
- Money left may not be payable to dependents
By default, any leftover funds from your annuity will not end up on the hands of your dependents. But this can still be negotiated depending on the provider and the features of the annuity product you’re purchasing.
Annuities provide a stable income source that you can use to secure your future. They pose very low risks and a stable income stream, making it the ideal choice if you don’t want to risk investing in stocks or mutual funds.
Before you purchase an annuity, weigh the pros and cons of the product. Make sure you’re not pouring everything you’ve saved into it because you’ll have trouble getting it back in case you need money for emergencies.