Annuities an alternative to producing a steady Income Stream

In today’s low interest environment, investors are finding it hard to earn enough interest from their savings account and term deposits to meet their income needs. So to make up for the short fall they will have to draw down on their capital to supplement their needs. There are of course many other alternatives to invest for income e.g. direct shares, fixed interest bonds, listed and unlisted property securities funds, direct property for rental income etc. I will not be discussing the pros and cons of these investments. Instead, I would like to highlight the efficiency of using an annuity [1]as an alternative to generating a regular and steady income stream.

An annuity is an investment that provides you with a series of regular payments in return for a lump-sum investment. There are 2 types of annuities, lifetime and fixed term annuities. These annuities can be assembled into many variations depending on the needs of the investors. For example: a fixed term annuity can be for 2years, 3 years, 5years, 10years or more. And in a lifetime annuity: you can have guaranteed minimum payment terms, indexation to inflation, various percentage of residual capital return etc.

The question most investors will ask is if it is a good time to lock in capital in an annuity especially in this low interest environment. There is often a sense that ‘rates will have to rise’ and so investors assume that it make sense to wait. When this question was put to Challenger Limited, the main provider of annuities in the market, their reply was:

• Interest rates are affected by a range of factors such as assumptions about economic growth, inflation, fiscal position and so on. Debt markets take account of all these factors and set prices for fixed income securities with maturities going out decades. These prices are known as the ‘yield curve’

• Annuity prices are set relative to the yield curve, so they already have future expected interest rate movements priced in.

• A low rate environment is not necessarily a ‘bad time’ to lock in secure retirement income. If rates rises in line with market expectations, as already reflected in the yield curve, then investors who buy an annuity will not be missing out

Source: Challenger Retirement Income Research May 2015

There is no one size fits all situations in the investment market, as there are other numerous matters to consider before investing e.g. taxation, Centrelink benefits, estate planning etc.

Please feel free to contact me if you want to discuss with som

eone immediately about your investment options. Otherwise, I look forward to having a discussion with you in the very near future.

Charles Choong

Director

First Pacific Financial Services Pty Ltd

------------------------------

[1] Please visit our website for more detail information of how an annuities works: http://www.firstpacificfs.com/#!blank/tbiq3

DISCLAIMER

The material shown in this presentation is for general information purposes only. It is not intended to be, nor should it be read as specific personal investment advice. Whilst all care is taken in the preparation of this material no warranty is given with respect to the information provided, and accordingly no responsibility for errors or omissions, including responsibility to any person by reason of negligence is accepted by Professional Investment Services Pty Ltd or any member or employee of Professional Investment Services Pty Ltd. Before acting on any of the information contained in this presentation you should obtain special advice from a specialist investment (risk) professional, which is appropriate to your specific investment needs, objectives, and financial situation.