Written

For

The

Australian

-

Why

rising

interest

rates

make

lifetime

annuities

a

compelling

option

for

retirees

What if I told you that a 65-year-old man could hand over $100,000 today and be guaranteed an inflation-linked income for life — with his estate getting the full amount back if he dies in the next decade? That's the pitch lifetime annuities are making right now, and with the RBA still in tightening mode, the numbers are finally starting to look interesting.

Here's the mechanics. You give an annuity provider a lump sum, they invest it — mostly in defensive fixed-income assets — and they pay you a guaranteed income for life. Because roughly 75 per cent of their book sits in bonds, rising cash rates translate directly into better annuity rates for new customers. Just remember: you're locked into the rate at commencement, so timing matters.

Right now, a 65-year-old male putting $100,000 into an inflation-linked lifetime annuity would receive just under $500 a month. Live to statistical life expectancy of 85 and you're looking at roughly a 4 per cent annualised return. Live another five years and it's above 5 per cent. Ten years beyond and you're over 6 per cent — guaranteed.

Die early? Providers like Challenger return 100 per cent of your capital to your estate within the first 10 years, then on a sliding scale. You can even cancel and get a chunk of your capital back.

The catch, as I see it, is that the annuity company is a for-profit business. It's not paying you every dollar generated by your capital — it has to keep something for shareholders and provision for the long-livers. A DIY version, mirroring their asset mix and drawing 5 per cent a year, could leave more for your estate — but you wear the investment risk.

Add in the favourable Centrelink treatment (only 60 per cent counted for asset and income tests), and for retirees near the pension thresholds, annuities deserve a serious look.