Pension or annuity?
If you are retiring soon and considering your options for turning your super lump sum into an ongoing income, there are three big issues to consider:
- Security of income
- Access to your savings
- The opportunity for your money to keep growing.
Although you probably would like to have all three, you may have to prioritise these, as this will influence what type of retirement income option you may choose: an account-based pension or an annuity.
What is an annuity?
An annuity is an investment provided by a life insurance company that gives you set income payments over a specified period. Payments are guaranteed for the life of the annuity, irrespective of what investment markets are doing.
There are lifetime annuities, which pay you an income until you die, and term certain annuities, which last for a set time, after which they may return some or all of the up-front cost.
What are the main features I need to consider with annuities?
- You have income security through guaranteed regular payments.
- You have no access to your capital.
- You have no opportunity for good investment returns to grow your money.
What is an account-based pension?
A pension gives you regular income payments, taken from your lump sum super savings. They’re called account-based pensions because, as with your super, your lump sum savings sit in one account with an ongoing fluctuating balance.
What are the main features I need to consider with pensions?
- You have greater access to your savings. You could withdraw a big lump sum, or change your payment amounts – within certain limits – if you needed to.
- Your money is invested, so it has the opportunity to keep growing.
- Conversely, you could lose money if investment markets fall.
- You have less income security. Your income stops when all your lump sum money is gone, or you may have to reduce your income to make your savings last long enough. (This is the essence of the ‘longevity’ problem – the risk that a retiree’s savings will run out before they die.)
So, there’s a lot to consider. How do I decide?
If you think both have their advantages and disadvantages, the good news is you don’t have to choose between pensions and annuities. For example, depending on your circumstances and after getting professional financial advice, you could use some of your super nest egg to buy an annuity and the rest to start a pension account.
There are a number of different types of pensions and annuities, with different conditions attached, that you’ll need to know about. In deciding what’s right for you, it’s important that you talk to your financial planner.