By Lina Martinez

Recently, the Australian government has made changes to the way pension law works. They’ve acted because they’re worried about how another financial meltdown might wreck retirement savings. As a result, the nature of the pensions landscape has changed dramatically. Back in 2004, there was only one company that offered any type of annuity to its employees. Now it’s something that is relatively commonplace. And it means that there are a bunch of new questions we need answering about pensions.

What Is An Annuity?

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Annuities are financial products that guarantee the holder a fixed income. It usually works as a series of payments, made across an entire year. In the past, the term annuity usually meant payments made over the course of a lifetime. But in today’s economy, that has changed somewhat. Now some annuities pay out for 20, 15, 10 and 5 years.

What Is A Self-Managed Super Fund?

A Self-Managed Super Fund is a way that you can save for your retirement and pay less tax. These funds are regulated by the Australian Taxation Office and, as a result, come with a lot of rules. For instance, you’re only allowed to use the money in the fund for retirement purposes. And you have to follow an investment strategy that is likely to meet your retirement needs. You also have to keep comprehensive records and get the regularly reviewed by an SMSF auditor. Companies like Blueprint Wealth offer SMSF advice for those who require more information.

If I Die Early, Will My Family Get Any Money?

At the moment, if you die young in Australia, your next of kin don’t get any money from your annuity. Instead, the money flows back to the annuities provider. The only exception to this is if you have a minimum payment term as part of your contract. If you do, it means that your dependents and your spouse will continue to get paid after you’re gone. Other financial products allow you to build in payments to relatives, following early death. But these so-called reversion annuities tend to be a lot more expensive.

Should I Take Out An Account-Based Pension?

The choice between an annuity and an account-based pension is a personal one. Some will prefer the safety of an annuity. Others will prefer the fact that an account-based pension can be accessed at any time.

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One of the biggest issues for many older people is the lack of access they have to their own capital. If you want to upgrade your home or go on a cruise, an account-based pension gives you more flexibility.

Of course, there’s nothing to stop you from doing both. In fact, many pension advisers recommend that people split their money between an account and an annuity. This way they get the flexibility they want, as a well as the guaranteed income stream.

Is My Account Pension At Risk?

A significant amount of your account-based pension will be invested in property and stocks. Like it or not, this is where the return is right now. And, as a result, account pensions may be at substantial risk. Many are still recovering from the last financial crisis.
 

Lina Martinez has her B.S. in journalism and is a contributor to our politics, life and money pages. She once admitted over drinks to singing "Careless Whisper" in the shower. We are still trying to get her to sing it at karaoke.