Is an annuity safe and is it smart ? Is it suitable as an investment for a 63 year retiree.? Does it make more sense to invest inside my SMSF or outside?
Top answer provided by:
Colin De La Nougerede
Your questions are quite broad and not knowing your personal circumstances I will try and provide a general overview for you then answer your specific questions:
Annuities are a low risk investment utilised to provide stable guaranteed income and are structured to do so over the respective term or life expectancy, that best suits your financial strategies. They are issued by a life insurance company and governed by the Life insurance act 1995.
Annuities if used as part of your overall portfolio will provide some certainty for cash flow management and remove the risk associated with market linked investments e.g. Managed Funds or direct equities etc. which will provide you comfort and balance from your investment.
There are numerous types of annuities, Fixed term, CPI or indexed, Life expectancy and Aged Care Annuities to name a few and can be structured to maximise cashflow and strategy to your personal circumstances.
Annuities are also utilised to assist with Centrelink and Aged care strategies – to provide the maximin cash flow and asset benefits.
You can purchase an annuity with Superannuation or Private funds. Individually or a joint annuity can be purchased with Private funds. Members of a Self-Managed fund can also acquire an annuity within the fund in accumulation or pension phase.
Like any investment there are the benefits and the risks associated to invest:
- The benefits of an annuity are predominantly the guarantee of cash flow and the security to know that there is no market related risk and the peace of mind to know there is some regularity of income to service your cash flow needs. This can be achieved via many structures from an Annuity and mentioned above.
- The risk associated with an Annuity is that you need to be comfortable that you do carry an Interest rate risk for the term of the annuity i.e.: if rates go up and you elected a fixed term Annuity you will may miss out on a higher rate of return, but this works both ways if the rates go down as they have over the last few years- you may benefit from a capital secure investment with a slightly higher rate of return.
- Annuities have limited flexibilities as they are structured to give you a guarantee over a period, and to maximise the benefits it is usually beneficial to run the term of your annuity.
- Modern Annuities have the capability to allow some flexibility to change if life or your financial strategies change, but these will come at some cost.
Before you invest always consider what your priorities are for your investment choices, and get the appropriate professional advice to meet these priorities.
To look at your questions in Isolation:
- Is It safe and smart- An Annuity is an investment albeit safer in structure still carry the risk of the provider who issues the annuity, and are subject their financial viability like all investment providers. Nb I have been using Annuities for a long time now and the providers utilised have been around for a long time and reputable in the industry. Although this is no guarantee for the future it does provide some comfort for my clients.
- Smart- Is subject to what you are trying to achieve- if you are looking for capital secure regular income to fund your lifestyle and are not too concerned about the longevity of your funds- an annuity will provide this for you. If you are looking for Growth on your funds invested, then maybe an annuity is not the right choice. My rule of thumb is an Annuity can form part of your overall diversified portfolio to provide some safety and security of income while your other assets provide the growth and tax effectiveness.
- Is it suitable as an investment for a 63-year retiree?
As You are a retiree, cash flow and income to service your lifestyle needs would be important but as mentioned above you need to understand your priorities and needs, your age does have some bearing on concerns regarding market volatility but you are also young enough to be concerned about longevity risk- if your assets only provide income and no growth to be able to sustain future income needs. If the Annuity provide what you are seeking then Yes it would be suitable.
Does it make more sense to invest inside my SMSF or outside?
Although most people consider Superannuation a dirty word- it is by far the most tax effective strategy we have available at the current time.
Not knowing if you are in Pension phase or Accumulation (I will assume you are in pension phase as you are seeking income by your question), your asset mix and the size of your fund- (as the new Caps to be enforced as at 1st July 2017 may impact your personal situation) and you income requirements , the structure of your SMSF and your long term goals- generally if you can invest via your Superannuation to enable any tax free income benefits is advisable. If legislation changes you still have some flexibilities to change where required.
As you can see there are a lot of variables you would need to consider to get the appropriate outcome. My advice is think of what you want to achieve and are concerned about, discuss this with your adviser or if you have been administering your own SMSF, as there have been a lot of changes recently – seek the appropriate advice from a suitably qualified adviser to explore your options going forward. Most good advisers offer a first appointment free of charge to better understand your personal circumstances as everyone is different get the advice that best suits your needs.
Hopefully this has assisted in some way-Good Luck
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