Annuities used to come with a number of Centrelink benefits and of course they allow you to walk away from any investment responsibility. The Centrelink benefits are gone (in comparison to the standard account based pension) but they still offer certainty of income in troubled times. This certainty tends to be seen as attractive when investment markets look shaky.
However, are they a good deal for the retiree? Now Jeremy Cooper (Cooper review - looking at making super stronger and ASIC - he championed the fight against conflict of interest in the advice community) who after advising the Government moved to head of distribution of annuities at Challenger, has put a price of $266,000 to ‘replace’ the government pension using one of his products. This would apparently pay a 65 year old male $17,400 in the first year and index for life. Life expectancy for a 65 year old male is 18.54 years (Lets round it to 20). Remembering that you don’t get your capital back for estate purposes, I calculate this equates to a return of approximately 5.4%pa.
To put this another way, if you had $266,000 in your super fund, didn’t mind it being used up in 20 years, but wanted an indexed pension (3%) of $17,400 you would only need a return from your fund of 5.4%. I doubt that there would be too many SMSF trustees who would view this return as being unattainable when cash rates are between 5-6.3%. So while I see the annuities market as nice for product pushers such as Jeremy, I don’t see them as being particularly attractive for would be users.
Of course if you live longer or inflation is higher, the required return is more. For example if inflation ran at 5% and you lived 25 years then the rate would be around 8.9%pa. So you can see that Challenger is taking a bet on longevity of annuitants and the economic assumptions they make. While this supposedly won’t be your concern, if they get them too far wrong you might just find Challenger having ‘challenges’ themselves.
So there is very little on offer here that you can’t do yourself, simply by restricting yourself to the same levels of income that would be payable under the product. I would suggest that you’re better off keeping your options open than tying yourself to a product that, in my opinion, doesn’t really add any value.
