Thinking outside the box: Using lifetime annuities to protect your loved ones

How can you ensure that your loved ones, particularly those more vulnerable, are cared for long after you’re gone? 

The traditional cycle of aging usually has adult children caring for their parents through retirement until they pass away. This may not be possible though, if you are the parent of a child with special needs. Not only must you continue their care well into your retirement, but you must plan for their financial future after you’re gone. 

Figuring out how to provide care for your child when you are no longer around can be stressful. In this situation, financial advisers face the unenviable position of guiding clients through one of – if not - the most emotionally charged chapters of their lives and put in place a robust, reliable, and deeply personal plan to protect their loved ones’ future financial security and quality of life.

In 2099, it is estimated that approximately four million people will have a severe or profound disability in Australia – more than triple the current number in 2009.ᵃ As such estimates are high, advances in services and accessibility for people living with a disability have come a long way in recent years.

Whilst these developments are to be celebrated, they present some additional complexities. One of which is, planning how to provide for, and having suitable care organised for a loved one with a disability when you are gone.

What’s more, the straightforward financial solutions designed to meet the needs of non-dependant adult children with special physical or mental health needs or who simply raise financial concerns, are becoming outdated. In Australia, almost one in five people have a disability. Of these, one in three has a severe or profound core activity limitation.ᵇ One of the most important things for the mental health of parents of the disabled is knowing that their loved ones will be cared for financially after they are gone.ᶜ

For us in the financial sector, we are presented with a monumental responsibility. We must develop the right advice, education, and tools to successfully manage these emotionally charged decisions. Crucially, those resources cannot be cookie cutter answers. To help support Australia’s dependant children we need to offer clients flexible, personalised tools that offer long term security and peace of mind. 

But what financial vehicles can we tap into for this flexibility? 

Traditional methods of providing for loved ones after you’re gone, such as trusts and wills can sometimes fall short of the certainty of knowing your funds will be transferred to your chosen beneficiary without being contested by others, be they even family members. This can create huge concern for clients who simply need the confidence that their loved ones will be provided for. 

One unexpected, and slightly unfamiliar, beneficiary payout tool that helps challenge this uncertainty comes in the form of the investment-linked lifetime annuity.  

Investment-linked lifetime annuities are typically used by retirees to provide a lifetime-linked stream of income, that can complement their super and any other income sources, like their Age Pension. And they are hugely successful at this too. 

But interestingly, our technical team has seen a surprising uptake of lifetime annuities to provide for loved ones after clients are gone.

Planning for their financial future, your way

Investment-linked lifetime annuities offer a level of innovation that’s not often found in traditional financial solutions; they are flexible and can be creatively applied in ways that cater to any family situation. 

When setting up a lifetime annuity, the investor can choose when they receive their income and have a choice of different investment options that they can switch between over the life of the annuity. Importantly, they can also elect a beneficiary or reversionary annuitant that will be paid an income lifelong. 

For some, they won’t require this level of tailored planning and straightforward solutions can work well. However, for those looking to ensure a steady stream of income for a loved one - for example a child with a disability, or a loved one with a complex mental health history - this could be the ideal fit. Ultimately, the annuity empowers the recipient and leaves the investor free to enjoy their final chapters knowing that their loved ones will be looked after when they’re gone.

Bringing this to life

Financial advisers can listen and understand their clients’ priorities, then set up lifetime annuities that will deliver on their unique concerns. For instance, an adviser can set up recipients with a lump sum or a lifelong income stream. For an income stream, they can specify to whom it goes, how much this income is and how it is invested, when they want to receive it, and even if they want to upweight it to specific life moments. 

For example, take a 72-year-old woman who is in the prime of her retirement – let's call her Wendy. Wendy currently has $50,000 in savings, $500,000 account-based pension and $30,000 by way of car and contents.

Despite these assets, Wendy is hesitant about her spending as she wishes to leave an income guaranteed for life to support her daughter, Jennifer. 

Jennifer is 50 years old and has a history of a complex mental health disorder. This impacts her ability to spend her income within her means. Based on Jennifer’s history, Wendy is worried that there is a high likelihood Jennifer could bankrupt herself unless she has a regular, long-term stream of income. 

By working with a financial adviser, Wendy sets up LifeIncome, an investment-linked lifetime annuity for herself using $200,000 she withdraws from her account based pension. Wendy nominates Jennifer as the sole reversionary of the annuity, which means Wendy doesn’t need to worry about anyone else trying to access Jennifer’s future income. This is because LifeIncome offers the protections of a life insurance policy, including from bankruptcy and estate claims. 

This way, Wendy has greater confidence to enjoy her retirement to its fullest knowing that she will have income for herself, but also a regular income stream for Jennifer which will serve as a safety net after Wendy passes away. 

Lifetime annuities can free Australians from the confines of believing that a great retirement comes at the expense of leaving something behind for those you care about. 

It is time for us to start thinking outside of the box when it comes to beneficiary planning, to ensure that we continue to adapt and innovate for the changing needs of Australian families with dependant children or loved ones. 

a. ‘Disability expectations – Investing in a better life, a stronger Australia’ – Price Waterhouse Coopers, November 2011, accessed 17 June 2024 https://www.pwc.com.au/industry/government/assets/disability-in-australia.pdf

b. Disability statistics, accessed 17 June 2024  https://www.aruma.com.au/about-us/about-disability/disability-statistics/

c. Creating Financial Independence for Grown Children with Autism, 29 June 2022, accessed 17 June 2024 https://www.psychologytoday.com/au/blog/what-will-you-do-when-i-m-gone/202207/creating-financial-independence-grown-children-autism