Retirement Incomes: advantages and disadvantages
Lifetime annuity
Advantages:
~ income is guaranteed for life
~ income may be indexed for inflation (at a rate of 3.0% pa), so purchasing power is not eroded by increased living costs
~ low exposure to investment risk
~ annuity purchase price attracts a 50% exemption under Centrelink’s Asset Test
~ income is Centrelink friendly, as a significant portion is not assessed under Centrelink’s income test
~ income is tax effective, as it includes a tax deductible amount and attracts a 15% pension rebate on the assessable income amount
~ where a reversionary pensioner has been nominated (eg, a spouse), they may choose to continue to receive regular pension payments, or commute the remaining capital to a lump sum
~ where pensioners die before the end of the guarantee period, the value of the remaining payments will be paid to their estate
Disadvantages:
~ no access to capital invested (ie, the annuity is non-commutable)
~ returns linked to prevailing interest rates at time of investment; if interest rates increase, pensioner will not benefit from higher income returns (if
interest rates fall, pensioner will benefit from higher interest returns).
~ income payments do not vary to reflect investment market performance
~ where pensioners die after the guarantee period, any entitlement to income or capital is forfeited (unless a reversionary pension has been nominated)
Term annuity
Advantages:
~ income is guaranteed for the term of the annuity
~ income is indexed for inflation (at a rate of 3.0% pa), so purchasing power is not eroded by increased living costs
~ low exposure to investment risk
~ annuity purchase price attracts a 50% exemption under Centrelink’s Asset Test
~ income is Centrelink friendly, as a significant portion is not assessed under Centrelink’s income test
~ income is tax effective as it includes a tax deductible amount and attracts a 15% pension rebate on the assessable income amount
~ where a reversionary pensioner has been nominated (eg, a spouse), they may choose to continue to receive regular pension payments, or commute the remaining capital to a lump sum
~ where pensioners die before the end of the guarantee period, the value of the remaining payments will be paid to their estate
Disadvantages
~ no access to capital invested (ie, the annuity is non-commutable)
~ returns linked to prevailing interest rates at time of investment; if interest rates increase, pensioner will not benefit from higher income returns (similarly, if interest rates fall, pensioner will benefit from securing higher interest returns).
~ income payments do not vary to reflect investment market performance
Allocated pensions
Advantages:
~ investment earnings on capital are tax-free
~ no capital gains tax paid for any capital realised — only drawn income is taxable
~ capital can be accessed at any time by making lump sum withdrawals (which are subject to ETP withdrawal tax)
~ income is tax effective; undeducted contributions will include a “tax-free” income component
~ income not received “tax-free” will be taxed at the marginal tax rate, however pensioners receive a 15% tax rebate
~ these are Centrelink friendly investments, as a significant portion of income is exempt from Centrelink’s Income Test
~ capital is not lost on death; balance can be paid to dependants, or in
accordance with will or estate
~ where a reversionary pensioner has been nominated (eg, a spouse), they may choose to continue to receive regular pension payments, or commute the remaining capital to a lump sum
Disadvantages:
~ income received will include a Centrelink deductible amount, but the account balance will be assessed under Centrelink’s Asset test
~ income payments not guaranteed; payments continue only until account balance runs out; account balance will depend on the performance of the underlying assets and the level of income the pensioner elects to receive
Term allocated pensions
Advantages:
~ tested under the pension RBL — allows a greater super benefit to be
concessionally treated
~ treated concessionally under the Assets Test for Social Security — 50% of purchase price/account value not counted
~ The pension term can be selected by the primary pensioner from a range of different terms; this gives more flexibility to choose a term closely aligned to the pensioner's needs
Disadvantages:
~ no guarantee of investment performance — in a negative investment climate, the annual payment could fall to reflect negative returns
~ the pensioner cannot select an annual pension amount — only one amount can be paid pa, according to statutory payment factors applying
~ no fixed annual income amount — both the changing value of the account and each new financial year’s payment factor will usually see a changing annual payment from year to year
~ limited recourse to a lump sum withdrawal
~ no guarantee that the pension will last as long as the life of the primary beneficiary
~ no provision for a residual capital value upon the death of the last survivor
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