When planning for retirement, ensuring a steady income stream is one of the biggest concerns for retirees. While many people rely on account-based pensions, annuities offer another option, one that provides guaranteed income for life. But are annuities the right choice for everyone? Let’s explore what they are, their advantages and drawbacks, and why retirees should consider them as part of their financial plan.
What Is an Annuity?
An annuity is a financial product that provides regular income in exchange for a lump sum investment. It is designed to ensure financial stability throughout retirement by offering guaranteed payments over a fixed term or for life. Annuities can be purchased through financial institutions or superannuation providers, and they come in different forms, including:
- Lifetime annuities – Provide income for life, regardless of how long you live.
- Fixed-term annuities – Offer payments for a set period.
- Deferred annuities – Payments start at a future date, usually later in retirement.
The Pros of Annuities
- Guaranteed Income for Life – Unlike market-linked investments, annuities provide a reliable income stream, protecting against longevity risk (the risk of outliving your savings).
- Peace of Mind – Knowing you have a stable income allows for better financial planning and reduces stress in retirement.
- Protection from Market Volatility – Annuities are not tied to stock market performance, making them a safer choice in uncertain economic times.
- Potential Tax and Age Pension Benefits – Some annuities are structured to optimise Centrelink entitlements by reducing assessable income and assets.
The Cons of Annuities
- Lack of Flexibility – Once purchased, annuities generally cannot be accessed as a lump sum, limiting financial freedom.
- Upfront Cost – The initial investment can be significant, making it a daunting choice for some retirees.
- Inflation Impact – Unless indexed, annuity payments may lose purchasing power over time.
- Lower Returns – Compared to market-based investments, annuities often provide lower returns, which could impact long-term financial growth.
Should Retirees Consider Buying an Annuity?
Annuities can be a valuable part of a retirement strategy, especially for those prioritising security over potential market gains. If you’re concerned about outliving your savings or want to balance your income sources, an annuity could be worth considering. However, it’s essential to weigh the trade-offs, understand the impact on your Age Pension, and explore options that best suit your needs.
How Futureproof Can Help
At Futureproof, we understand that financial security in retirement is a top priority. That’s why we are developing the Equity Preservation Mortgage®, a revolutionary solution that allows retirees to unlock the equity in their home while maintaining ownership. Through this innovative product, retirees can convert a portion of their home equity into an annuity-style income stream, providing financial stability without the need to sell their home. If you’re looking for a way to supplement your retirement income while preserving your assets, Futureproof is here to help.
