Deferred Lifetime Annuities

•    The Government will encourage the development of deferred lifetime annuities

•    Deferred lifetime annuities are purchased income streams payable for the life of the purchaser where the income stream only commences once the deferral period ends.  For example an investor could pay $300,000 to the annuity issuer for an income stream to commence in 10 years’ time.  The annuity issuer takes the $300,000 and invests the money during both the deferral period and when the income stream commences.  The invested monies are owned by the annuity issuer and, consequently, not held on trust for the purchaser and not accessible by the purchaser.

•    The principal means of encouragement will be by having the underlying investment income, derived during the deferral period, taxed in the same way as superannuation income is taxed: – without this change, the underlying investment income derived during the deferral period would have been taxed at the normal company tax rate.

Comment

•    Even with the change, annuity issuers will have to contend with the inherent downside of deferred lifetime annuities which are

-    as lifetime products  -  the purchase price will be lost on early death (subject to any minimum payment periods)

-    lifetime annuities effectively operate as wealth transfer from annuity purchasers who die early to those who survive longer

-    as lifetime products the amount of capital required to support the annuity issuer (unless the capital adequacy rules are changed) is considerable and implicitly operates to dampen the annuities investment return.