Annuities are growing their place in the Australian retirement landscape
The annuity equation will stack up for more people in the future. Photo: Getty
Australia’s nascent annuities market is showing strong signs of growth with market leader Challenger reporting recently that its annuity sales jumped 6 per cent to $1.1 billion in the first quarter.
That is a significant indicator because Challenger accounts for 63.4 per cent of the annuities market. The government has moved to boost the attractiveness of annuities by extending tax-free superannuation status to a range of longer-term annuity products that missed out previously.
Annuities are agreements that essentially commit financial institutions to pay fixed amounts to people for a specified number of years or the remainder of life.
While annuities only accounted for 13.8 per cent of superannuation pensions paid out in the June 2016 year, according to the Australian Prudential Regulation Authority, the numbers are moving in a direction that is likely to see them account for an increasing part of retirement incomes.
The number of people taking annuities grew at 2.8 per cent in 2016 while the overall number of superannuation accounts grew by slightly more at 3.5 per cent. But the value invested in annuities grew at 7.6 per cent while the industry generally grew at 6.1 per cent.
The growth in the amount paid in overall super pensions did outstrip the growth in annuity pensions. But the demographic trends in the market mean that the landscape is changing in a way that will favour annuities.
David Simon, principal of Integral Private Wealth, said that “annuities don’t work for people with lower balances. They’re aimed at people with larger accounts”.
Research commissioned by the Australian Institute of Superannuation Trustees confirms that assessment. “Retirees with lower super balances – of $250,000 or less – will be better off by investing in an account-based pension as opposed to either an annuity or a combination of both products,” the AIST report found.
The following table indicates that the punters know that to be true.
At first glance you would think that pensions in the table are totally insignificant, but a closer look at the figures reveals something interesting. While the number of people taking a lump sum on retirement and the amount they take swamps the numbers for super pensions almost by a factor of 10, the amount they are taking is pretty small.
Those taking a lump sum took on average $23,620 while those taking a pension took an average of $16,592. But the pensioners will take that every year while the lump sum withdrawals measured here will be one-offs or will be followed by pension payments.
It implies that people with low balances take lump sums. But as more people retire, those who have worked for longer with high superannuation contributions and balances are more likely to take pensions and annuities.
With average retirement balances for men now around $322,000 and women $180,000, according to the Australian Bureau of Statistics, the potential for growth in the annuity market is strong.
That’s because more people will be retiring with balances above the $250,000 that AIST found to be critical for annuities.
Mr Simon said annuities can be useful in later stages of retirement when people want the security of knowing exactly how much they will be getting while in care or in a situation where they are not confident to make financial decisions.
Returns on annuities have been hit by the low interest rate environment. “A 15-year annuity from the age of 65 now pays 3.6 per cent a year,” Mr Simon said.
“Back in 2009 people were getting 7 to 9 per cent locked in for 20 years so now they’re doing very well.”
Challenger says a $100,000, five-year annuity will pay $1797.24 per month or $21,556.88 a year for that time while a 10-year will pay $984.03 per month, or $11,808.36 a year.