Re: Personal Investment Strategy Help
Absolutely no idea. All I know is that you can choose the term, and also whether you want the capital returned as a lump sum at the end, or progressively each payment, or a mixture of both. There's probably a lot of possible scenarios, hence the lack of any calculators or tables.
Annuity providers profits would appear to come from the excess return that they can achieve with your funds above the agreed rate of return at the start of the contract they made with you. Since they bear all of the market risk by guaranteeing your capital, you could assume your return would be low to compensate.
I guess the difference between this & giving your money to a managed fund, is that their profits come from their performance in the market, rather than FUM fees. Someone may want to confirm this.
Any financial planners here who can shed some light? DeepState might know something?
Hi guys,
From the position of an annuity provider like challenger and for why they can't provide rates on their website, simply think of them as an insurance company and how an insurance company won't provide a 'rate' without gathering some simple details first before offering you a 'premium' and a contract to accept.
So like an insurance company whenever you enter a contract to purchase one of their products they need to do a little 'underwriting'. For them it's not just a simply case of paying you an interest rate and then going away and making a higher return on investment for a year or a couple of years. They need to calculate and balance their investment portfolio and books and thus return offered depending upon the type of contract they are signing. (eg, if you sign up for a lifetime annuity that is linked with CPI, essentially the annuity provider challenger etc are doing some simple calculations around your expected life left and their forecast for CPI growth over that period of time prior to offering you the 'interest rate' on top). So they are making a bet that you will live for a certain amount of time and inflation will be a certain rate when calculating the interest return they will offer you. It is fairly important for a company signing contracts such as these to get their assessments around longevity and inflation correct, if they get them wrong and find their annuity book overexposed to these kind of deals things could turn sour quite quickly for them.
So someone who tries to sign up for a lifetime annuity in their 30's should be obtaining a rate different to someone who is in their 50's. The size of annuity contract you are signing could also have an impact on the rate offered, they won't offer the same rates to someone investing 10k vs 500k etc. If not a lifetime annuity the length of term will have an impact on the rate offered. It also could obviously differ if the annuity is to be in superannuation or with funds not in super.
Annuity terms can be fairly negotiable and the variables and time of signing ensure that there is no standard rate that they can provide on a website etc, so each can be tailored to the particular persons needs.
The truth is we fairly rarely use them (at a rough guess it probably only comes under consideration for 1 in 50 of the clients we see and we probably only include them as part of end strategy in about 1 in 400 of the clients we see), obviously the loss of liquidity and ability to move your capital once you are in can be difficult to justify and overcome if there are other low risk products that suit your needs and offer a comparable or better return. I do know that our business has a deal with Challenger to provide our clients slightly higher rates on quoted annuities (I believe this to simply be an extra 0.25% on the contract). We are fee for service and charge 0 commissions on any product. I would suggest if you are interested in the idea of annuities but don't know if the returns will be attractive or not, simply use their websites or call them to obtain a couple of quotes (you will probably have to put up with a follow up call or two from them after to try to close the deal).
But if you can put up with that inconvenience it will allow to see what rates they will currently offer you. I would suggest if you think it looks like a good deal for you to come seek the help of a financial adviser, 1. to see if it is really the right thing for you to lump into an annuity and make sure there are no other alternative strategies to consider. 2. to simply see if the quotes they can obtain on your behalf can get you a better deal. You could probably ask them before paying or seeing if they can get better than market annuity rates, which could make your outlay for seeing the advisor pay back quite easily over time.