Advisers urged to revise annuity strategy
Advisers who recommended using a lifetime annuity to escape a 1997 ruling on means tested unemployment benefits for people over 55 should consider revising the strategy in light of May’s federal budget.
Bridges head of technical services, Ross Johnston says the recent budget removed superannuation from the means test for the long-term unemployed. The change, which came into effect on July 1, overturns the 1997 ruling that included superannuation in a means test for the dole for the first time.
Many of the 54,000 people affected by the 1997 ruling were advised by their financial planners to convert their savings into lifetime annuities, to preserve their super savings while maintaining eligibility for Centrelink benefits.
“In 1997 when the Government brought this ruling in, there were close to 54,000 who were going to lose their social security benefits,” Johnston says.
Johnston does not know how many of the 54,000 actually chose to invest in annuities, but he says Bridges moved $30 million into lifetime annuities after meeting with clients affected by the 1997 ruling.
Now that the Government has returned to pre-1997 days of not means testing superannuation for unemployment benefits, Johnston says those that converted their superannuation into annuities have foregone the higher returns offered by superannuation funds and have been forced to draw down on their retirement nest egg.
“Investing in annuities means giving capital to a life company which means becoming overweight in fixed interest,” Johnston says. “Super is a better option because it enables people to invest in growth investments, which produce better returns.”
Johnston says the Government has given no reason for the recent policy backflip, but he believes the unpopularity of the ruling was a major factor, and notes that Labor was strongly against any ruling which forced people to dip into their super savings before age retirement age.
Now financial planners are faced with the difficult question of advising their clients to reconvert their annuity back into superannuation which could attract large penalties from the product providers. In some cases, the penalty might be too harsh to warrant the change.
However, there is a loophole which allows a person to roll an annuity into another annuity product, then cashing it out within the ‘14 day free look’ period.
“Normally, I don’t like to recommend using a loophole,” Johnston says. “But the unfairness and inconvenience of the Government’s backflip on its own ruling has left a lot of people in a worse situation.”
But this loophole will be closing very soon, says Johnston. In September, the Government will be moving to pass legislation which forbids the rolling from one annuity to another for the purpose to cash out of the product structure. Additionally, he says they might even bring in hefty penalty fees.
Recommended for you
With Insignia shares up 32 per cent in the past month and the firm enacting a five-year growth plan, Morningstar believes the two recent acquisition bids from private equity firms demonstrate the company is undervalued.
As financial advisers enter the new year, Assured Support shares eight strategies to help advice businesses thrive through focused and consistent planning.
Insignia Financial has received a takeover bid from a second US firm, topping Bain Capital’s offer with a bid of $4.30 per share.
As the year comes to an end, Money Management takes a look at the biggest announcements that shocked the financial advice industry in 2024.
