I like to describe a fixed term Annuity as being similar to a Term Deposit (TD) where you receive 100% back of the capital you invest on maturity. Annuities are a safe and secure investment option that provide guaranteed income and are not affected by the ups and downs of the market. You invest some of your savings for a chosen period (or for the rest of your life) and receive guaranteed, regular payments from that investment. Sounds the same right? Well almost. Annuities can be tailored to suit your personal situation and typically they should form part of a larger retirement plan – so it’s important that you seek advice before investing.
There are of course other Annuities on offer structured to provide for a partial or no return of capital on expiry. In such instances, the actual periodic payment from the annuity will be higher than a TD as the payments include a proportionate return of capital in each payment. This can be an advantage or a disadvantage depending on the client’s perspective (and needs) but it does represent a fundamental difference between the two. Where a lifetime annuity has no RCV, the return of capital on the death of the annuitant may be significantly reduced, or even be $0.
In this article we are going to look at the main differences between a TD and a fixed term Annuity that provides you back 100% on maturity.
| Feature | Main Differences | Term
Deposit | Annuity |
|---|
| Fixed Interest Rate | A TD rate of return is usually lower than an Annuity rate of return. | Y | Y |
| Fixed Term | A TD investment period is usually 1 month to 10 years and an Annuity 1 year to 50 years | Y | Y |
| A longer term will carry a higher interest rate | Yes usually, however you need to do your homework as this is not always the case. | Y | Y |
| I can rollover my money | At the end of the investment (the maturity date) you can take it back out or roll it over again but remember the rate of return will be what it is in the current market place not what you started with) | Y | Y |
| Withdrawal Penalities | Yes however they are different for all providers and if this concerns you then speak to us for further information. | Y | Y |
| Minimum and Maximum Investment | With a TD usually around $1000, with an Annuity $10,000. No maximums. | Y | Y |
| Can I add to my investment | No however you can start up a seperate investment with a TD or Annuity. | N | N |
| Do I have a choice of when I receive my interest paid? | A TD interest can be paid fortnightly, monthly, quarterly, yearly or at the end of the term.
An Annuity interest can be paid monthly, quarterly, half yearly or yearly. | Y | Y |
| Can I use my Super? | Yes however not all super funds will offer a term deposit or annuity option. You will need to check this. Also this transfer will count towards your super balance cap of $1.6 million. Speak to us for further information. | Y | Y |
| Will I pay tax? | If you are investing non-superannuation monies, the income will be assessed. Superannuation investments are generally tax free. | Y | Y |
| Efficient interaction with Age Pension | Yes but not with short term annuities (read below) | N | Y |
| Is there a cost? | There is no cost to open a TD. To open an Annuity an Adviser will either charge you an upfront fee (which is what we do) or on ongoing fee built into the rate of return. Ask me about this. | N | Y |
Longer term Annuities (such as Lifetime Annuities) provide you with the peace of mind of having income for life regardless of share market movements. One of the biggest attractions to longer term Annuities is the efficient interaction with Social Security which can potentially increase your Age Pension entitlements. In terms of social security a TD is subject to deeming whereas a long term annuity (100% RCV) is assessed under the income test on the actual level of income paid. Where the income from an annuity is higher than the deeming rate, a TD will be more favourably assessed for social security purposes.
As the Age Pension is means-tested, Centrelink will take into consideration your income and assets to determine how much Age Pension you are eligible for. Annuities are just one of many different strategies that can help maximise your benefits. There are thresholds and many rules around this and I suggest you talk to us further if you are looking at retiring and seeking the Age Pension, to see how we can help you.
If you want to find out more information, please call me on 07 5668 1012 or 1800 882 473 and we’ll have a chat over the phone or head to the ATO website www.ato.gov.au whichever you find easier!
Disclaimer and General Advice Warning:
xseedwealth pty ltd. (ABN 56 126 371 346) is a corporate authorised representative 466622 of Alliance Wealth Pty Ltd (AFSL 449221 I ABN 93 161 647 007) and Professional Investment Services Pty Ltd (AFSL 234951 | ABN 11 074 608 558)
The information provided in this communication has been prepared as general advice only and has been issued by Centrepoint Alliance Ltd and Alliance Wealth Pty Ltd (AFSL 449221) and Professional Investment Services Pty Ltd (AFSL 234951). It is based on our understanding of current regulatory requirements and laws as at the date of publication. As these laws are subject to change you should talk to a professional financial adviser for the most up to date information.
We have not considered your financial circumstances, needs or objectives. You should consider the appropriateness of the advice and seek the assistance of a financial adviser before acting on any advice contained in this communication. Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither Centrepoint Alliance Ltd nor its related entities, employees or agents shall be liable on any ground whatsoever with respect to decisions or actions taken as a result of you acting upon such information.
