Annuities - suddenly the newest thing
As most Australians know, we are living in a period of increasing interest rates and with this, we will see an increasing amount of talk about a particular type of financial product, so called annuities, which will be aimed at those nearing or in retirement.
Just quickly, an annuity is where you pay an amount of money, say $500,000, up front and the company providing an annuity will guarantee to pay you a set amount each month or year for the rest of your life.
This can sound very attractive, particularly if the payments are indexed for inflation. It means you can invest your funds, and for as long as you live, the agreed regular payment will turn up in your bank account month after month.
When you pass on though, typically the company providing the annuity will keep whatever is left of the upfront payment. If you live a long life, you might come out in front, if you don’t live a long life, the company providing the annuity will come out in front.
Having said that, there has been a lot of work done these days to improve annuities and no two annuity products are the same. They vary as to whether you or your estate will receive any capital back, whether the payments are fixed or indexed for inflation and a raft of other items hidden in the small print.
The reasons they are going to be heavily promoted once again, and they have been around for decades, is that they are largely backed by various fixed interest products and so have struggled to offer a reasonable rate of return in low interest rate days. Now rates are higher, that’s changed.
All annuities are heavily engineers financial products. By that I mean, there has been a lot of work done behind the scenes to set them up. Everyone from actuaries working out the average life expectancy of Australians through to large marketing companies paid to promote them work on these products.
All of these people need to be paid for their work and all of these expenses are bundled into the cost of the end product. So, by definition I think these products are expensive.
I also think there is a lot of fine print in the contracts that you need to be wary of and the thing I dislike most about them is that you make a decision today that locks you into what will happen to your money for the rest of your life.
That’s not to say all annuities are bad or that they may not be right for you in your particular circumstances. They could be, but my advice would be to think long and hard before you sign up for one of these products and ask as many questions as you can.
If you still don’t know if they are right for you or if you are uncertain then you need to speak with a professional licenced financial planner like myself.