Annuities & Allocated Pensions

Annuities & Guaranteed Income Plans

An annuity or guaranteed income plan is a means of turning a lump sum amount into a regular income stream, that is, the annuity will pay a guaranteed rate of income over the term of the annuity. Annuities are generally either 100% Residual Cash Value (RCV) or Nil RCV. A 100% RCV means that all of your original capital is returned to you at the end of the term (similar to a term deposit). A Nil RCV is where all of your capital is paid to you via regular income payments leaving you, as the name implies, with a zero capital balance at the end of the term. Some guaranteed income plans allow you to choose an RCV of between 0 and 100% thus allowing you to choose how much balance you would like at the end of the term.

Other features of Annuities and Guaranteed Income Plans include:

·        Worry free - income is 100% guaranteed for the term of the contract.

·        The client does not incur any investment risk.

·        Annuity can be bought with Eligible Termination Payment or Ordinary funds (non-ETP).

·        Can “income split” with a spouse by purchasing an Annuity with non-superannuation monies.

·        If a client purchases an annuity when interest rates are high they are “locked in” at the prevailing interest rate and do not have to worry if (and when) interest rates fall as all income payments are 100% guaranteed by the paying institution.

·        Conversely in a rising interest rate environment, clients are “locked in” at the prevailing interest rate at the time of purchase and cannot take advantage of any increases in interest rates.

·        Access to capital is limited - the client either cannot commute their policy - or for contracts where commutations are possible they may face heavy penalties to redeem their investment capital.

Allocated Pensions

An allocated pension is an investment in a superannuation fund that can provide a regular income stream that is just like receiving a wage or salary. The income received from an allocated pension can be very tax-effective because some of the income may be tax-free and the balance will usually carry a tax offset of 15%. 

The income from allocated pensions is flexible, as you can vary the level of pension payments each year, within the prescribed minimum and maximum amounts (determined by the Government).

Other features of allocated pensions include:

·        A range of investment options - an investor can choose to invest in a variety of funds, and decide upon the appropriate asset mix.

·        Access to capital – you are currently able to redeem part or all of investment.  This is known as a “commutation”.  Please note that redeeming all or part of an allocated pension may trigger a lump sum tax liability.  

·        Investors may elect for pensions to be paid to a spouse or the account balance paid to the estate on death.

·        There are no guarantees on rates of return or investment performance and, therefore, no guarantee of future income or capital.

·        An allocated pension cannot be “income split” with your spouse.

·        Funds are exhaustible, as there is the potential for the capital to be run down to zero over time.  This risk can be minimised by:

-        Drawing the minimum annual pension;

-        Investing some or all of the pension monies in growth assets like shares or property; and

-        Not redeeming any capital from the investment (commutations).