How can an annuity ease your retirement years

An annuity, sometimes called a lifetime or fixed-term pension, is a retirement income or pension product. You can buy an annuity from a super fund or a life insurance company for a lump sum. 

Annuities are different from account-based pensions where your balance fluctuates with the market. With an annuity you’re assured of a specific amount at a regular interval, and you don't have to worry about losing money if the market crashes. So if you’d like to ensure that you have enough money for daily expenses and bills after you retire, this could be an option worth exploring.

The amount you’ll receive from an annuity is determined by how much money you invest in buying it. You can receive annuity payments at monthly, quarterly, half-yearly, or annual intervals. 

You’ll receive payment for an agreed term if you opt for a fixed term annuity or for as long as you live if you’ve got a lifetime annuity. Your annuity income increases each year by either a fixed percentage or is indexed to inflation. 

 You could purchase an annuity jointly with your partner. In the event that one of you dies, the survivor gains full ownership and access to the annuity payments.

With an account-based pension, your money is invested in a portfolio that could be made up of shares, bonds and property. While there is a risk that your wealth could reduce due to a fall in market prices, there’s also potential to earn attractive returns.

With an annuity, on the other hand, you’re assured of a fixed and regular income irrespective of how the market performs. If set up to last for your lifetime, your payments will keep coming in,  unlike an account-based pension that could become depleted completely.

If you want to use your superannuation funds to buy an annuity, you must have reached your preservation age. Preservation age is simply another way of saying the age at which you can begin to withdraw your super, and is typically between 55 and 60 years. You will also need to meet a ‘condition of release’ for your super, such as retiring from employment or reaching the age of 65 (or 67 from 2023).  

When you buy an annuity with super money, your income from the annuity is generally tax-free if you’re aged 60 or more. If you buy an annuity before turning 60, but after your 55th birthday, your income is taxed at your marginal rate but there’s a 15 per cent tax offset. 

You can also buy an annuity with your personal savings, but the income you earn from it might be included in your assessable income. It’s worth reading the product disclosure statement carefully to understand how your income is going to be taxed. You may also want to speak to an expert to find out how your annuity income might affect your tax payments.

You have options when purchasing an annuity to either nominate a reversionary beneficiary or select a guaranteed period. If you appoint a spouse or dependent as your reversionary beneficiary, they will keep receiving payments for the rest of their life, but at a reduced rate. Your beneficiary may receive, say, 60 per cent of the amount you were previously receiving. 

If you’ve taken a guaranteed period annuity, your beneficiary will receive payments after your death, either as a lump sum or at regular intervals until the stipulated period ends. The payments to your beneficiary will not be lower than those you had been receiving.