Annuities

What is an Annuity?

Annuities provide a guaranteed income stream for a set time period, or for life. Often used to provide certainty of income to meet fixed costs in retirement, annuities are treated favourably by Centrelink when certain conditions are met. Other income streams such as account-based pensions, can then be used to cover discretionary spending as they have more flexibility to be adjusted over time.

How does it work?

Annuities can be grouped as fixed term and lifetime and have key characteristics as observed below.

	Fixed Term	Lifetime
Ownership	Individual or joint names (non-super only)	Individual
Indexation	You can increase income payments at each annual anniversary in line with CPI or a specified rate	You can increase income payments at each annual anniversary in line with CPI or a specified rate
Residual Captial Value (RCV)	You can get part, or all, of your capital returned to you at the end of the term	Not available
Withdrawals	Withdrawals are not normally available	Available within a defined “withdrawal period”
Guarantee period	-	You can choose this to protect you from a premature death and loss of capital. Enables payment of lump sum death benefit if you die within guarantee period
Revisionary beneficiaries	If super money, it can revert to a spouse or, a ‘dependent’ as defined by tax law. Non-super money, no ‘dependent’ requirement	If super money, can revert to spouse or, a ‘dependent’ as defined by law
Death benefits	Joint name, non-super, will continue to owner. Individual will be paid as lump sum death benefit to beneficiary or estate	If death occurs within guarantee period option payment can be made to beneficiary or estate

‍Tax treatment of annuities

If purchased with super money, the annuity income stream will be taxed as a super pension such as an account-based pension or transition to retirement pension. If non-super money has been used to purchase the annuity, the return of capital in each income payment is tax free, and the balance will be taxable income. This will need to be declared in your annual tax return.

Centrelink treatment of annuities

New lifetime income streams, with a permissible surrender / death value, have a significantly reduced asset and income test for Centrelink and Aged Care payment calculations:

Asset test: 60% of purchase price up to and including age 84 (with a minimum of 5 years) and 30% thereafter.
Income test: 60% of income paid is assessable income.

Where the surrender / death value exceeds permissible limits, the greater of that surrender / death value or 60% of the purchase price (and then 30% from 84) will be the assessable portion for the asset test. The income test remains the same as above.

This differs significantly to fixed term annuities where the full purchase price is assessable for the asset test initially. It then reduces every 6-12 months to reflect the return of capital and is done through a "deductible amount" to reduce the assessable asset. For income test purposes, the deductible amount reduces the assessable income payment for Centrelink with one exception. Where the term is 5 years or less and the term is shorter than the client’s statistical life expectancy. Centrelink deeming rules will apply in this instance.

What are the benefits?

Annuities provide guaranteed income that you can rely upon, some with favourable Centrelink and Aged Care assessments.
Annuities purchased with super money when you are over 60 are tax free, unlike superannuation that is concessionally taxed.
You can commence an annuity with non-superannuation savings.
Death benefits can be paid from a fixed term annuity or within the guarantee period of a lifetime annuity (optional feature).
You can nominate a residual capital value on your fixed term annuity. This will give you a lump sum at the end of the term.

What should I be thinking about?

You cannot vary the amount or frequency of income you receive from an annuity once it starts.
Lifetime annuities do not have a residual value meaning that there is no lump sum payable upon death to your estate or beneficiaries. You have the option to include a guarantee period which will make a lump sum payment if you die prematurely within the guarantee period. You may make withdrawals on some lifetime annuities, depending on the terms of your product. Fees may apply.
Your annuity balance is not market linked and will not benefit from investment market capital growth and income.
The interest rate of return on your annuity is fixed at purchase. Should interest rates increase, you will not benefit from the upside of this increase and in fact, the purchasing power of your income payment may reduce if no indexation is applied.

Important information regarding this information

This information is of a general nature. It does not consider your personal objectives, needs or situation. It does not represent legal, tax or personal advice and should not be taken as such. If it has been provided to you with a Statement of Advice (SoA), you should rely on the personal advice in the SoA.

Care has been taken to provide up to date and accurate information relating to the subject area however BR Advice Pty Ltd (ABN 30 612 056 523, AFSL 488655), Blue Rock Private Wealth Pty Ltd (ABN 95 166 927 055, AFSL 452733), Blue Rock Private Wealth (Melb) Pty Ltd (ABN 48 652 202 698, ASIC AFS No. 1298365) and their representatives make no representation as to its accuracy or completeness.

Published: September 2022.