People retiring this Christmas have a new investment option that has been lacking for several years. Bank term deposits are now paying enough interest to be worth considering. It is possible to get four per cent for a twelve-month deposit with regular interest payments.
That might appeal to some people because super funds and pension accounts have had a bad year. However they have been creeping back up quite nicely over the last month or so. Nearly half the losses have been recovered so far.
The outlook appears quite good. As discussed previously the problems have been caused by rising interest rates to control inflation. Inflation seems likely to start to flatten out soon, as it has in the US for example. That should then mean interest rates reaching their peak.
Once investors feel sure rates aren’t going to rise much further they will become much more interested in shares and property again. In fact they already are starting to regain interest in shares, lifting prices.
So personal pension plans should be able to earn enough to cover a five per cent income payout rate over the next few years, and probably more. If a pension account earns at the same rate as it pays income the balance won’t fall. If it earns more, the balance will rise.
That is the aim, so the money won’t run out before the retiree does. Managing your own money isn’t that difficult with help from professionals and it allows the retiree to keep control of their capital.
There is another genuinely new investment option available to retirees. There are new, quite attractive annuity products that carry a forty per cent discount on the Centrelink Assets Test, allowing retirees to qualify for much more age pension.
The Government changed the rules recently to allow market linked annuities. Companies like AMP and Generation Life have launched these new products. Other companies are also developing them.
Once the retiree invests, the money cannot be accessed. It is tied up for life. However there are repayments if the retiree dies early. If they pass away in the first few years most, though not all of the money is refunded.
If the retiree lives past their life expectancy they will continue to be paid no matter how long they live. However, when they pass away there will be no lump sum refunded.
These are called market linked annuities because the retiree can invest in areas likely to earn much greater returns than fixed deposits. If they do, the retiree is paid higher income payments. Meanwhile they can also receive more age pension because of the forty per cent Assets Test exemption.