A deferred lifetime annuity involves paying a lump sum amount upfront, usually when you retire, in order to have the right to enjoy a predetermined income stream at a set point in the future.

At the moment very few Australians will have heard of them, but one part of the package of changes announced last month could change that situation.

This is the proposal to give these annuities a similar tax break to that enjoyed by the assets that back income streams, most of which are account-based pensions (previously known as allocated pensions).

The investment earnings generated by these assets are tax free. If the proposal for deferred lifetime annuities is implemented then, from July 1, 2014, they will get the same tax-free status during the so-called deferred period.

By providing this concession, these deferred annuities will become more attractive, since the investor will stand to get more for his or her upfront payment.

The motive for buying a deferred annuity, most of which are issued by the Challenger group, is to insure against running out of money during your retirement.

For example, a retiree who feels he or she is likely to live longer than average could pay, say, $30,000 to buy an income stream that doesn’t start to be paid until they are in their mid-80s. This income could be quite high due to the compounding of investment earnings over 20 years or so and the fact that only those who live long enough get paid.


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