Consideration of lifetime annuities is a regular agenda item in our review meetings for retirees over recent months. This is partly due to the relatively attractive annuity payments on offer following the increase in bond rates over the past couple of years.

It is important to understand the differences between “lifetime annuities” and “account-based pensions”. This article explores the key differences between these two types of retirement income streams.

 Account-Based Pension

• An account-based pension is an income stream product available to retirees who have reached their preservation age and satisfied a condition of release.
• The income is drawn from your superannuation balance.
• You have control over how much you withdraw and when – subject to minimum pension payment standards.
• The pension amount can fluctuate based on market performance.
• You can nominate beneficiaries for your remaining balance.
• Tax-free income if drawn from superannuation funds after the age of 60.
• Investment earnings on superannuation assets funding pensions are typically exempt from tax.
• Can be invested in various assets – including cash, bonds, property and shares.

Lifetime Annuity

• An annuity is an investment that provides a secure, regular payment over a known period in return for an upfront investment. There are two main types: lifetime and fixed-term annuities.
• A lifetime annuity ensures secure, regular income for the rest of your life or the life of a second person (e.g. your spouse as a reversionary beneficiary).
• Modern lifetime annuities offer more flexibility, allowing access to capital and options for payments.
• Annuities are not affected by share market volatility.
• Annuity income can be indexed to protect against the rising cost of living.
• You can nominate beneficiaries for your remaining balance on death (same as account-based pensions)
• Generally tax-free if purchased with superannuation funds after age 60.

Summary

Account-based pensions rely on your superannuation balance and offer flexibility, while lifetime annuities provide guaranteed income for life and are less influenced by market fluctuations.

Consider your personal circumstances and preferences when choosing between these options. We would always encourage you to seek professional financial advice from a licensed financial adviser.

If you would like to discuss lifetimes annuities with the team at Wealth 21, please contact Kylie on (07) 5445 3441 to arrange an appointment.

Sources: moneysmart.gov.au; challenger.com.au; canstar.com.au