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SMSF interest in annuities may ignite

SMSFs could begin to consider lifetime annuities as a viable retirement income option rather than traditional account-based pensions (ABP) as more trustees entered the sector with lower fund balances.

Colonial First State retirement general manager Nicolette Rubinsztein said historically there was not very much interest in annuities from SMSFs and most trustees entered into ABPs upon retirement.

“I think it’s an area that they just haven’t thought of that much and the balances in SMSFs are usually so great that they might not need to,” Rubinsztein told selfmanagedsuper.

“Also a lot of SMSFs don’t get financial advice, only about 30 per cent do, so the bulk is doing it themselves and annuities may not be a familiar product to them.”

She said the ideal candidate for annuities would have about $200,000 to $1 million.

“If you have more than $2 million you might say you can live off your assets, so why would you annuitise?” she said, but noted more Australians were setting up SMSFs with lower balances.

“A lot of SMSFs have $500,000, so in that case it does make a lot of sense to annuitise and I think it’s a growing area where we might actually see them open up [to annuities] as we see them increase in profile.

“What’s interesting with SMSFs is that you see a lot of money in term deposits so they are wanting certainty and arguably they’ve got too much money in cash-type investments.
“Plus about 50 per cent of all SMSFs is in retirement money so it makes you double check on why their asset allocation is more on the conservative than you might think you should be.”

She said annuities had been dismissed and overlooked in the Australian market, however, there was a shift in thinking currently at play.

“I think that’s true for the market – there’s been a real obsession with ABPs,” she said.

“Also people see annuities as getting a low rate, but you’ve got to think of it as longevity insurance.

“The other key change in thinking is that it’s part of your defensive asset allocation so instead of putting 40 per cent into defensive assets, you could put 20 per cent in defensive assets and 20 per cent in a lifetime annuity.

“It helps you rationalise why you’re investing into an annuity, instead of saying an account-based pension with a 60/40 mix versus an annuity and compare the rates, which one is better?

“There’s been quite a few profound shifts in thinking that are leading to [better consideration], so I think they will grow in popularity.”

During a Sydney media briefing on the longevity conundrum, CommInsure head of annuities George Lytas said annuities provided tax and maximisation opportunities and offered a higher optimal retirement outcome as people were living beyond their life expectancy.

“Lifetime annuities can become a more tax-effective and social security-effective planning strategy,” Lytas said.

“The other thing about annuities is that you can take them out at any age so you don’t have to take them out at 65, so there’s a lot more flexibility than what people thought.”

According to the DEXX&R “Market Projections Report”, as at 30 June, the total assets held in the retirement incomes market were $486 billion, of which SMSFs controlled 62 per cent or $302 billion of funds under management (FUM) in that pool.

Retail allocated pensions had the next largest share of FUM, controlling $144 billion, which represented a 30 per cent market share, followed by industry pensions with $28 billion of total FUM in the market, which represented a 6 per cent slice.

Annuities represented $10 billion, a 2 per cent market share in retirement incomes FUM.

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