Comparing Allocated Pensions against Annuities
Generating and maintaining a long-term income is an important aspect of retirement.
Commonly, most retirees find themselves deciding between the two board types of income streams: account-based pensions (formerly known as allocated pensions) and annuities. An account-based pension is an income paid to you from your superannuation fund.
In recent years account-based pensions have been the popular option as they offer control, access and flexibility.
1. You control the investment strategy and how much risk.
2. You have the ability to access a regular income and as well as make ad-hoc withdrawals; and
3. You have the flexibility to change the investments, alter the income drawn (subject to government set minimums) or wind-up the account at any stage.
However, this trend appears to be changing and annuities are set for a resurgence. Thanks in part to the appreciation for capital security after the GFC and account-based pensions losing their concessional Centrelink treatment from 1 January 2015 (grandfathering applies to some pre-1 Jan 2015 account-based pensions).
Annuities are a low risk investment for people who want to receive regular guaranteed income payments for an agreed term or their lifetime. There are various different types of annuities, but in its simplest form, an annuity is like a bet with an insurance company. You pay them a sum of money and they work out how long you are expected to live. Then, they pay you a guaranteed sum of money until you die. If you die sooner rather than later, they make a profit. If you live to a ripe old age, you are the winner.
Historically, the major drawbacks with these annuities is that nothing is left to your estate and inflation erodes that value of your income. They are also less flexible than account-based pensions as you cannot make lump sum withdrawals. However, new annuity products available in the market today provide you a greater range of choice to try and counteract some of these disadvantages.
One of the key advantages of annuities is that they can still provide significant Centrelink benefits. Correct structuring can provide concessional income test assessment and in some cases concessional asset test treatment. This is set to be a clear advantage over account-based pensions, particularly as we approach 1 January 2017, where the legislated changes to the Centrelink asset thresholds are set to take effect.
Given the range of changes already seen in both these types of income streams, and the pending 1 January 2017 Centrelink reforms, it is best to meet with your financial adviser to discuss the best option for you.