Deferred annuities set to grow, given right conditions

The annuity market has the potential to grow by eight times in the event that deferred annuities are made available within Australia.

This growth could come about if certain regulatory conditions were altered to make annuities more attractive and flexible for those in retirement, according to Swiss Reinsurance head of strategic and inforce solutions Trevor McMahon and Swiss Reinsurance business development actuary Ilan Leas.

McMahon and Leas presented a paper to the recent Actuaries Institute Summit in Sydney in which they state that research has found the market share of lifetime annuities — with complete removal of any impediments — would reach a maximum level of 10 per cent of total assets.

At present, total lifetime sales are less than 0.5 per cent. McMahon and Leas said that while growth is possible, 10 per cent was probably not achievable, since modelling from the United States shows that uptake of annuities in a voluntary market was around 2-4 per cent of eligible investors.

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However, McMahon and Leas said a number of regulatory hurdles still needed to be tackled to promote annuities in a wider sense, including the requirement for an annuity to pay a benefit annually and the application of standard minimum surrender values on annuities. The latter makes annuities unattractive for providers who may have to deal with investors who use the minimum surrender provisions if it becomes apparent to them that they are not likely to reach the age at which the deferred annuity or pension is payable.

Minimum draw-down rules in the first year of an annuity also offer a hurdle to market growth, with McMahon and Leas pointing to a positive shift — in that the tax treatment of earnings on assets during the deferral period of an annuity have been placed on an equal footing with other risk products.

The Australian annuity market continues to suffer the absence of any compulsory requirements, default options or extended tax advantages to purchase an annuity, McMahon and Leas said, but the relative cost differential of a deferred annuity product against a lifetime annuity is expected to make them more attractive to advisers and consumers.

"The key attraction to consumers of these products is that they offer a guaranteed income stream but at a significantly cheaper price than traditional immediate annuities in terms of outlay, which is reflected in the upfront cost. You cannot run out of money and you arguably have capacity to increase your risk profile on the remainder of your investment portfolio," McMahon and Leas said.