@Chagsy it’s a while since we looked at this for my wife for her QSuper account when we retired and converted to pension stream (she is now 64 years old). We had a free consult with someone from QSuper. From memory the longer you live the better the deal you get. On the flip side, if you pass early in life, your family will only get back what you put in less what they’ve paid out to you (from memory). We decided against it because your account is whittling down straight away, whereas our current super is growing as we withdraw. I haven’t gone into putting into an annuity at a later stage in life. It might be worth getting some professional advice on.

@Chagsy I’ve just realised I’m probably talking about a different product offered by QSuper called a “Lifetime Pension”. It’s different to an annuity. More info here: https://qsuper.qld.gov.au/news-hub/articles/2021/04/01/03/09/what-you-need-to-know-about-lifetime-pension#:~:text=The%20Lifetime%20Pension%20is%20able,provide%20lower%20rates%20of%20income.

@Chagsy that sounds like a fantastic retirement plan.

All I can recall of annuities was an ill fated meeting my wife and I had with a financial advisor a few years back (i.e. we were probably both late 40’s). He was trying to illustrate a point that we had done pretty well already and had already developed a good nest egg with which to retire. He tried to illustrate the point by taking our net investable worth and showing us what size annuity we could buy. She thought that’s what he was recommending (which with a disabled son who needs to be provided for long after we are pushing up daisies and the annuity has stopped paying out for us is totally not appropriate). Needless to say, the poor fellow never got any business from us.

But here were the big things that I took away from the fiasco:

• I can’t remember how the indexation on the Annuity stream worked (i.e. did the annual payout track inflation) but that would be an important aspect to understand (especially as we’ve just been going through a period of abnormally high CPI increases.
• The annuity model effectively works with the financial institution investing the money, funding the annuity stream from the earnings / growth (i.e. they make a couple of % margin there) and then hoping you die sooner than the actuarial tables say you should (which is additional margin for them at risk). To me, this was also able to be achieved with a self managed portfolio with enough income producing stocks. I.e. I can construct something similar to a self managed “annuity stream”
• To that end, I’ve started a gradual process of “transitioning” holdings to SMSF. Ie. I have over 10 years to migrate the SMSF from a higher mix of growth stocks to a higher mix of dividend earning stocks. It’s slow because I’m trying to do it in the most tax effective way and the amounts you can contribute to Super are relatively low. I envision that over the next 10 years, the SMSF will hold virtually all the bond allocation across our total portfolio (makes sense to only pay 15% tax on the earnings especially when this asset class suffers its capital being eroded by inflation. Additionally, I think most of the ASX200 part of the portfolio (which has high annual % dividends with franking credits) will also find its way toward the SMSF. I hope to generate incremental annual returns by selling covered calls on those stocks. Not that we are anywhere close to the top numbers yet but it also allows us not to trigger any of the crazy new super rules (eg. Paying tax on unrealised gains) when the portfolio could go up or down with the increased volatility of a growth oriented portfolio.
• The inheritance planning associated with an annuity product is probably something to really have a good think about. Again in that context an annuity to give you a baseline income as part of a broader portfolio strategy might still make sense where things like Family Home, a separate share portfolio / investment property etc. can still be passed on to the next generation. (In my case this consideration is higher than most as I know my young fellow won’t generate an income beyond a disability pension and we conceivably need an extra 50 years of income for him given he’s 37 years younger than us).

That sounds eminently sensible @RhinoInvestor

Annuities have largely fallen out of favour, and potentially with good reason (as your personal case demonstrates).

After my recent research, I think they probably do have a place but not for everyone. If you have a relatively low balance and are really going to have a significant reduction in your annual drawdown if you have the bad luck to retire just before a GFC-like event, they can add certainty against this sequencing risk.

Secondly, as outlined, later in life they can provide a good hedge against longevity risk.

Other than that there isn't too much benefit, other than security of income.

Morning star are running a decent set of seminars atm. You can access them free on yourtube: https://www.youtube.com/user/morningstaraus/videos

They also offer some really useful spreadsheets to aid modelling which I think you can also access for free, see show notes in the above.

I am s subscriber and have downloaded, so if you can't access them and are interested, just PM me and I can forward them thru to you.

Same goes for anyone else who is would like a copy.

Best wishes

C

Thanks @Rick

I am also with Qsuper so was intrigued by that product. As your subsequent post clarifies: these are different products. By being in a Balanced fund with a fixed draw down (Lifetime Pension) you are still very much exposed to a sequencing risk. As I have previously outlined, this doesn't matter if you don't need to keep drawing down on these assets to fund essentials and can wait for the market to recover. If you HAVE to draw down on those assets then this sort of product will create a significant dent in your total asset base, hence reducing your pool for future income. Having a cash buffer that covers several years of essential outgoings will negate this risk. If this is you, then an annuity is not of value in early retirement. It may be of value late retirement - hence the "age 73" discussion - if your expected drawdown rate will not cover outgoings if you unexpectedly live to 103 and require 7 years of very expensive high care nursing home fees.

For others that want to leave an inheritance (or cover future ongoing expenses eg @RhinoInvestor) having a significant percentage in growth assets is, of course, essential.

Not all annuities are created equal. The challenger group offer a huge range of options and are probably the biggest provider of annuities. One other thing to consider is that if the annuity provider goes bust, well, you can be in trouble.

Sorry to discuss financial products and retirement investing options in a small cap space, but it was something I wasn't aware of, might be of interest for some people, and was of significant import to my immediate financial plans. To all the others; your time will come!

@Chagsy I also had a cursory look at Annuities in the past year or so (likely for much the same reasons as you - considering retirement). Like you I came to the conclusion that it offers more benefits to those with lower balances and I think here in Australia specifically in the case of those also having access to and using the aged pension as part of their income plan (because of the beneficial treatment of the value of the annuity for aged pension asset test purposes - i.e. it can make it easier to meet the tests to get the pension)

One way I was thinking of these being useful in general is for those using a bucketing style approach in retirement - e.g. one bucket with growth assets (which you basically leave growing and only sell down to refill the cash bucket during "the good times") and one with stable cash and cashlike assets which you draw down your income/spending from (so that you're not a forced seller). I can see a scenario where some part of this cashlike bucket is made up with annuities and/or things like that. I read recently of someone using the Hostplus CPIPlus product in a way that reminds me of this strategy (the CPIplus product seems to me to be annuity like)

My Super fund also has annuity options (basically Challenger underneath) and I went to one of my funds seminars on this. There seemed to be quite a lot of different options to the annuities as well - like the standard CPI linked, but also RBA cash rate linked, various market index linked, etc and also things like ability to withdraw for a time, death benefit, etc - so they appear not to be as rigid as they used to be and are a lot more flexible these days

There are also some online retirement calculators that can take these into consideration of one wants to model them out