Higher interest rates are causing great distress to many families in the mortgage belt, but they’re good news for older Australians, with one retirement income strategy experiencing boom times.
The new/old kid on the block is annuities.
While those with substantial mortgages are feeling the pinch with each rate rise – from 0.1 per cent in April last year to 3.35 per cent now – the increases are delivering relief to savers and retirees.
Annuities are a perfect example and one provider, Challenger, was able to pay holders of its three-year annuities a 5 per cent rate by October last year. That’s up from just 1.5 per cent in mid-2021.
That hasn’t just been good news for Challenger’s annuities clients, but its shareholders, too. On the back of the annuities resurgence, the ASX listed company’s share price jumped by nearly 5 per cent to $7.59. And it reported record sales of annuity products, which surged 41 per cent to $3.5 billion, in the second half of 2022.
Challenger chief executive Nick Hamilton told the Australian Financial Review: “For retirees, higher interest rates provide additional income, so they’re not living off as much capital but rising inflation clearly creates cost of living pressures.”
The AFR report noted that annuity sales tanked by more than 25 per cent in the two years to 2020, largely as a result of the financial services royal commission and the resulting exodus of advisers. Purchasers of annuities generally do so on the basis of financial advice.
Remind me, please, how do annuities work?
An annuity, also known as a lifetime or fixed-term pension, gives a guaranteed income for a number of years, or the rest of your life, depending on the type you select. An annuity will provide a fixed yearly amount, regardless of external factors, such as inflation and interest rates.
As with all investment strategies, an annuity comes with pros and cons.
The pros include having a regular guaranteed income regardless of how share markets perform, being free from anxieties of bearing investment risk, and being tax free from age 60 if purchased with super.
But the icing on the cake for older Australians is that only 60 per cent of the earnings from annuities is counted in the Age Pension income and assets tests.
On the other hand, you have no say in how your money is invested, your money is locked away (apart from the annual income) for the term of the annuity and, if you purchase an annuity when interest rates are low, you’ll likely see others earning more than you during periods of higher interest.
YourLifeChoices’ 2022 Insights Survey answered by more than 6000 respondents, found a low uptake of annuities. Asked, “Would you consider taking out a CIPR (Comprehensive Income Product for Retirement) such as an annuity?”, 5.6 per cent said they already had and 5.7 per cent said they would. However, 58 per cent said no and 30 per cent were unsure.
Those attitudes may be changing as interest rates continue to head north.
Do you have an annuity? Are you now considering purchasing an annuity? Why not share your thoughts in the comments section below?
Also read: Annuity rates soar 44 per cent in 12 months
