What are the pros and cons of annuities in Australia?

Will an annuity serve your financial planning objectives? You may feel that annuities provide security but not as much flexibility as some other options. Consider the advantages and disadvantages of annuities before you make a decision.

• The main advantage of an annuity is that you’re assured of a fixed income. An annuity is not linked to the performance of the market, so you’re not affected even if the market prices of underlying assets crash.
• You can opt for an annuity that will give you an income for your entire lifetime. This is an advantage compared to an account-based pension, which could deplete completely during your lifetime.
• You can use an annuity to provide for a loved one after your death by nominating the individual as a reversionary beneficiary.
• If you get an indexed annuity, your income increases each year, either by a fixed percentage or indexed to inflation.
• You can opt to receive annuity payments for a fixed term, or as long as you’re alive. 
• You have the option to get your annuity payments every month, quarter, six months, or year.
• You can use your super to buy an annuity, and the annuity income you get after you turn 60 is tax-free.
• You can choose whether to receive your annuity payments regularly, or as a lump sum at the end of the defined term, or a combination of both.
• You and your partner can invest in an annuity jointly. If one of you dies, the other owns the annuity and continues to receive the payments. 

• Compared to another retirement planning product, the account-based pension plan, an annuity doesn’t offer the opportunity to earn high returns. An account-based pension invests your money in a portfolio that may be made up of equity, bonds, real estate, or other assets. So there is a good chance of earning high returns if the market performs well. With an annuity, your returns don’t increase even if the market booms.
• As annuities are highly secure, they are invested in extremely conservative options that may earn lower returns than the market average.
• The annuity is governed by rules drawn up by the company you buy it from. These rules may prevent you from cancelling the annuity and withdrawing all your money, if you ever need to. If your annuity company does allow you to take your money out, they are likely to deduct an amount from it.

When it comes to annuities, the advantages and disadvantages need to be considered carefully before deciding to invest in one. Go through the product details carefully, and speak with a financial expert if you have questions.