The product characteristics that have acted as a deterrent to the use of annuities have now been rectified, leading to an increase in the popularity of these offerings, a superannuation expert has said.
“I think the reason people haven’t been investing in annuities in the past is because they were concerned about dying early and [having] the insurance company profiting from that … but the design is so different now,” Mercer Australia retirement consulting principal Angela Hartl noted.
“There’s a death benefit and a surrender benefit that means actually that doesn’t happen, so I think the education [about this development] needs to increase.
“[So] I think the reason [why] people are starting to invest more in them is because of the improvement in the structure.”
According to Hartl, advisers and their clients should not be looking for one definitive solution when assessing their retirement income options.
“[Our analysis shows] there are typically three products advisers use when they’re helping clients in retirement – annuities, account-based pensions and cash,” she revealed.
“But I think really the takeaway [message] is there is no one product that actually meets all three retirement income objectives [of maximising their expected retirement income, managing expected risks to the sustainability and stability of their expected retirement income, and having flexible access to expected funds during retirement].”
To this end, she suggested a combination of products and structure would more likely produce the desired outcome.
“If you structure a retirement portfolio with an account-based pension alongside an annuity, where the annuity forms part of the defensive asset allocation overall, then that can improve retirement outcomes for your clients,” she suggested.
Mercer Australia modelling showed a portfolio containing 60 per cent growth assets and 40 per cent defensive assets will produce a better income result when an annuity contributes up to 30 per cent of the defensive allocation.
''