08 Apr How can you profit from using an annuity in this day and age?
Accessing a higher Centrelink pension, diversifying risk away from growth or market linked assets. Today we will look at the Challenger Liquid Lifetime Annuity and how it works.
Guaranteed Annuity is designed to pay a regular income and be guaranteed for the life of the owner of the annuity. They are similar to a term deposit in that they pay a fixed rate of return for a period of time either being the recipients life expectancy or 15 years. There are tips and tricks to ensuring that you get the most out of an annuity. The most heavily utilised benefit of an annuity is to increase access to age pension. Here is how it works….
Lets say you are not receiving a full age pension due to assets being in excess of the assets limit for full pension, is an annuity the answer?
You may be able to increase the amount of pension you are receiving from centrelink by contributing money into a liquid lifetime annuity (LLA). The interest rate you receive should be similar to a term deposit rate. This poses another question, as I write this April 2nd 2015 , interest rates are really very low. The prospect of locking in a lump sum for such low rates may not seem so inviting. This is where the trick is , you need to factor in the increase in the pension entitlement. I will give you an example, I have a client that we are looking to contribute $150,000 to a limited lifetime annuity. Now the rate of return on the annuity is around 3%. Take in the additional pension achieved and the real return climbs to almost 7%. These figures shall vary from client to client but the message is that annuities have a real place to sit in a portfolio.
Annuity, what to watch out for?
Like anything there is always a trap, the LLA is guaranteed only if held for the full designated period or if the recipient dies during the term. Whilst it can be broken early the LLA is not guaranteed if it is. There are also significant advantages at cashing in at year 15 that your adviser would talk you through. The other trick is that you do not want to place all of your allocated money to one annuity. Generally it is better to break it up across two or three smaller annuities. This does not affect the rate of return you receive and it allows flexibility in case you need to get access to money you can break one of the three annuities instead of having to break just one which causes more issues if you had intended to leave the remainder invested.
The information provided in this blog has been provided as general advice only. We have not considered your personal financial circumstances, needs or objectives. Not all will be suited to an annuity and there are a multitude of other factors you need to consider before making a final decision. Most importantly, seek advice on an annuity from a licensed professional financial adviser before making any decisions.