Mark to market: Annuities – will I get my money back?
More retirees are looking for guaranteed returns. Mark answers 3 common questions on annuities.
Question:
Your articles are, as usual informative and down-to-earth.
Drilling down on the topic of Annuities, a couple of questions come up for me:
- What safeguards exist to ensure that the Annuity Provider won't go broke, for example in a recession or heaven forbid a depression, when returns to them are lower than what they're paying out to me?
- I understand that some Annuity products have nil value when you die and others can be redeemed early if you want out. The Challenger product you mention at around 5% payout p.a., where does it sit?
- ASX share dividends are tax paid (at 30% company tax rate) where bond and bank interest is not. What are the tax implications of an Annuity return?
So ideally what I'd like to do is have an each way bet by placing a substantial amount into an annuity or bonds until the next major share market downturn (we know there'll be one sooner or later, obviously on the expectation that it would be sooner - sequencing risk) then redeem it and buy back into the share market on the upswing side of the bear market. My guess is that such product/s aren't favourable to such an approach!
Answer:
Annuity providers are regulated by APRA. They ensure that the annuity issuer holds enough assets to be able to make all of the payments to pay out the annuity. However, this capital is invested by the annuity provider. The APRA requirements are stronger than the requirements for corporate bondholders.
It is more than likely that the annuity issuer holds more than enough capital to pay you back. If anything happens to the company, your annuity payments need to be made to you before bond holders or shareholders get paid. I will say that annuities are not guaranteed like a bank account or term deposit. While remote, there is a small amount of risk just like there is a risk that a life insurance provider could not have the funds to pay under certain (although hard to imagine) situations.
It is important to speak to your annuity provider about the specifics of getting your money back. However, I don’t think it is a great idea to use this as a strategy to temporarily house money until the market falls. That is not really what they are designed for. Most annuities have a certain number of years you can get your money back but there is a formula that determines the amount of money that is returned.
The taxes on an annuity depend on if it is super or not and your marginal tax rate. You can have an annuity in your super and the taxes would match any other tax within super. It is it is outside of super you will be taxed on income like any other income. Depending on the environment the taxes would be the same as a dividend paying share although there are no franking credits.
If you have a question you'd like to ask Mark, you can email him at mark.lamonica1@morningstar.com