Annuities: the good, the bad and the ugly?
The Federal Government regardless of which side of politics is in power, just doesn’t seem to be able to help itself from fiddling with Australia’s superannuation system and one area it is trying to shake up, is retirement income.
The focus is squarely on industry funds but of cross in making rules for retirement funds, the Government is obliged to make all super funds comply with the same rules, whether the owners of those funds want those changes or not.
The Federal Government seems to be obsessed with what it believes is the failure of retirement incomes or more specifically a concern older Australians are hoarding funds within their super accounts.
That they are not choosing to spend as much income as they could or in the Government’s eye should, in preference of ensuring those savings will last as long as they do and choosing to leave funds behind for their children.
I think the owners of these superannuation accounts should have the freedom to do what they choose to do with their superannuation savings. The Government thinks otherwise.
In the New Year, you will hear a lot about annuities as the Federal Government is going to push for industry funds to make annuities a cornerstone of their retirement income policies and will encourage to older Australians to take them out.
Annuities have been around for decades. They are a contrived financial product, where in the most common examples you give a financial institution say $500,000 up front and they will agree to pay you a regularly monthly income for as long as you live.
When you die, any remaining funds in your account will go to the financial institution promoting the annuity. It’s a bit of a bet. If you die early, the financial institution is the winner, and you don’t, it is less of a winner.
These days no two annuity products are the same. You can now vary the length of an annuity, and the amount paid to you across your lifetime, but this basic structure is common to all annuities. So why will you be hearing about them next year?
Th Government wants industry funds to make it compulsory that when you retire you take a certain amount of your superannuation savings as an annuity. That this will give retirees the confidence that they have a fixed regular income coming into their Bank account month after month and this should cover all their bills as long as they live and encourage retirees to spend more of their super.
I think these are expensive and unnecessarily complex products, that will do little to encourage retirees to spend more and could lead to substantial profits to financial institutions and less money inherited by the next generation.
I hope these changes aren’t compulsory but there will be a lot of marketing and hype around them that will make it seem that you have to do take out an annuity. I hope commonsense prevails and people see through this.