Keeping annuities alive

Annuities are probably the oldest product in the adviser’s toolbox, having been around for more than 2,000 years.

Their origins can be traced back to the Romans, who made a single payment to an Annua and received lifetime payments once a year.

The English writer Charles Dickens left an annuity of £300 a year to his daughter when he died in 1870, as long as she remained single.

Annuities were also paid by grateful governments to figures such as Lord Nelson and the Duke of Wellington for their service to the nation.

However, this product may be relegated to the history books after September 20 when the Government changes the rules on the tax treatment of annuities.

The Government is abolishing the existing 50 per cent concessional tax treatment on complying income streams from that date. A complying annuity bought before then still receives the concessions.

However, all is not lost, as the Government has abolished the Centrelink asset test on these products after September 20, ING technical manager George Avramides explained.

“This has to be weighed against losing the tax concessions after September 20, but it will mean most will get an extra 1.95 per cent return on their pensions,” he said.

Avramides said this opens up a window of sales potential for annuities until the September cut-off date.

AMP Financial Services director, savings and retirement, Peter Nicholas said he was a great believer in annuities.

“There is a big opportunity for these products before September 20, as long as people are willing to lock their money away,” Nicholas said.

“One feature that has been attractive to annuities is the 50 per cent exemption, but that will be ending.”

Even after September 20, according to Nicholas, for the client who wants their money safe, paying a guaranteed income in a set-and-forget strategy, the annuity is still very attractive.

“If you look at annuities that are CPI (consumer price index) indexed, this is attractive for people who want to avoid the challenges of market risk and longevity risk,” he said.

AXA general manager, wealth management, Steve Burgess said annuities were one of the few non-risk products they can create because an annuity is a policy and still relevant for certain clients.

Annuities essentially deliver a guaranteed income, which is attractive to a considerable number of retirees, Burgess said.

“The income is locked in at a rate and is not subject to stock market fluctuations, which is what these people like.”

Burgess admits with the changes to the 50 per cent concessional rate after September 20, the big question will be whether annuities can survive into the future.

“After September, the annuity will have to deliver a minimum level of income depending on the client’s age,” he said.

“But the clients want a secure, guaranteed income, and how many retirees will want that in the future?”

An opposite view to the gloomy predictions of the annuity’s demise is held by CommInsure.

The company’s general manager life, superannuation and investment products, Clive Levinthal, said: “We think annuities are very relevant, especially after September for a number of reasons.”

“CommInsure is actively speaking to advisers who have clients who are conservative in nature, as there are very few products that offer guaranteed returns.”

Levinthal said it would be hard to name a product that guarantees a return for 20 years or more.

There was also another reason why he believed clients would look to annuities again.

“When there is volatility in markets caused by events such as September 11, there is a flight to safety by investors,” Levinthal said.

“As soon as there is a wobble in the Australian stock market, products such as annuities have relevance.”

He said annuities were a good strategy for clients wanting that guaranteed return, and this fact was creating a higher awareness of the products.

One drawback of annuities is that they cannot be surrendered easily. Life companies will buy back annuities, but at a heavy discount to the policy’s value.

CommInsure has offered some short-term relief with repayment of the full value of the initial investment if surrendered within five years.

Levinthal said the investor gets the full value of their initial investment back regardless of whether the company has made any annuity payments in that period.

ING’s Avramides said an allocated pension would be the product of choice in the future for clients who want a guaranteed return.

“With an annuity, the returns are low and the rate is struck for the entire life of the product,” he said.

“An allocated pension return can be varied by the investor to include some market performance, and there is better access to the funds.”

CommInsure is so confident of the future of annuities it has launched new products into the area.

“We have launched a market fund type annuity that offers a higher return than the guaranteed annuity due to its exposure to the Australian stock market,” Levinthal said.

“Another feature we are adding to annuity products is risk insurance such as disability cover, which provides income for higher living expenses.

“There is lots of scope for innovations in this area and we are looking at offshore products to see what can be introduced here.”

AMP’s Nicholas said his company was looking at overseas developments in these products to see what could be introduced into Australia.

“With some investment companies failing recently, I think people would be comfortable knowing the product they have invested in is backed by a life company with adequate reserves to pay the annuity throughout the life of the policy,” he said.

“… the products are unfashionable at present, but I see the day in the not-so-distant future when they will return to the mainstream.”

Nicholas said the problem is that there are more flexible pension products available in the market, and that has led to the drift away from annuities.

“We are keeping a watching brief on annuities to see what happens in the market, but we don’t believe they are dead,” he said.

However, not all annuity product providers have the same level of confidence for the future.

Burgess said AXA has no plans to close its annuity products, but he admits there won’t be any funds spent on product development either.

“We would want to see a level of support for the products after September 20 before we commit any funds to annuities,” Burgess said.

“It would be pointless spending money if advisers tell us these products are no longer being included in portfolios.”

He said many people were investing in superannuation for their future incomes, but accepts there is a generation that doesn’t have large enough balances at present to afford the incomes they are looking for in retirement.

“We might see some cannibalisation of the term deposit market as people use annuities to provide an income in addition to their superannuation,” he said.

“But the Government has created a new regime for annuities that we haven’t experienced before.”