Challenger Term annuities

SMSF Cashflow Strategy product guide

Challenger Term annuities

OverviewA Challenger Guaranteed Annuity is also referred to as a fixed term annuity. Fixed term annuities create regular, guaranteed cash flow for your client’s desired term, regardless of how investment markets perform.

The information in this guide relates to a Challenger Guaranteed Annuity with no remaining capital (RCV0) at the end of the investment term purchased by a self-managed super fund (SMSF).

Just like many other investments, an SMSF buys a fixed term annuity with an initial capital amount. They choose to receive regular payments over a term of between 1 and 50 years. The trustee then decides whether they want monthly, quarterly, half-yearly or annual payments. An RCV0 fixed term annuity allows for the initial capital investment to be returned throughout the term, along with interest, as part of the regular payments. The trustee can also choose to have payments indexed.

The rate of return the trustee will receive is established at the time they apply for the annuity, and will depend on the product options they choose and prevailing interest rates.

Challenger Term Annuities

Challenger RCV0 Guaranteed Annuity product features

Investment term 1 to 50 years (in whole years).

Minimum investment $10,000

Capital repayment The capital will be repaid as part of the regular payments throughout the investment term. At the end of the term there is zero residual capital value.

Payment indexation If the trustee’s chosen investment term is at least two years, then they can choose to have the regular payments increased annually. The annual increase can be in line with increases in the Consumer Price Index or a fixed whole percentage rate of up to 5%.

Payment frequency Monthly, quarterly, half-yearly or yearly.

Voluntary withdrawals The trustee can withdraw before the end of the investment term (in part or in full). However, the fixed term annuity is designed to be held until the end of the investment term and so the fund might not receive the benefits they would have, had they not withdrawn, and they might receive back less than they invested.

Upfront adviser service fee Up to 0.55% (including GST) of the capital investment multiplied by the investment term up to a maximum of 2.2% (including GST).

Ongoing adviser service fee An agreed dollar amount.

Challenger Term annuities

Adviser fees Where an upfront adviser service fee has been negotiated, the fixed term annuity’s regular payments are reduced to reflect the amount of the fee.

With the fixed term annuity, a trustee can agree to the payment of an ongoing adviser service fee, which can be deducted from the SMSF’s regular payments. This means that the regular payments are reduced by the amount of the fee and the net amount credited to the SMSF’s nominated account.

Taxation treatmentAnnuity payments received by an SMSF may be taxed under the Taxation of Financial Arrangements (TOFA) provisions.

Where TOFA applies, the overall gain from a fixed term annuity will be included in the SMSF’s assessable income applying an accruals basis over the term of the annuity. The accrual allocation methodology adopts an implicit rate of eturn approach.

The Australian Tax Office website offers a ‘Guide to the taxation of financial arrangements’ which specifies how to calculate the assessable income under the TOFA provisions, including the default Accruals method.

Valuing a fixed term annuitySMSFs are required to use market value reporting for their financial accounts and statements.

For the purpose of valuing a fixed term annuity in the SMSF accounts the fund accountant and trustee will need to satisfy themselves that an appropriate method of value has been used that satisfies the ATO requirements of market value based on objective and supportable data.

A fixed term annuity can conceptually be valued based on a number of approaches such as:

• The withdrawal value of the fixed term annuity;

• An actuarial calculation of present value of future payments.

About Challenger LifeTrust is a must when it comes to your finances and this is never truer than in retirement.

Challenger Life Company Limited (Challenger Life) is the issuer of the Challenger Guaranteed Annuity. Challenger Life is part of the Challenger Limited group, specialising in providing Australians with financial security in retirement. It offers award-winning annuities, allocated pensions and superannuation products.

In 2016 Challenger Life was named winner of the AFA/Plan for Life ‘Annuity Provider of the Year’ for the ninth year in a row. These awards are issued by AFA (Association of Financial Advisers) and Plan for Life Actuaries and Researchers, and recognise life insurance company excellence in the provision of products and services to financial advisers and their clients. For further information about these awards, you can refer to the AFA website.

Challenger Life is supervised by the Australian Prudential Regulation Authority (APRA).

Risks of investing in Challenger term annuities

As with all investments, annuities carry some risks. These risks include the risk of locking up your money for an extended period of time, potentially receiving less back than the amount originally invested if you terminate the annuity early, and the risk that the provider is not able to meet the payments under the annuity when they are due.

The key risks and how they are managed are described in the product disclosure statement (PDS) for the relevant annuity. Therefore, before deciding to invest in an annuity your client should read the PDS (including the information about significant risks) and consider the suitability of the annuity to your client’s circumstances.

This information is current as at 8 August 2017 and is provided by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 (Challenger), the issuer of the Challenger Guaranteed Annuity. It is intended for financial advisers only and must not be passed on to retail investors. It is also general information, not financial product advice, and has been prepared without taking into account any particular person’s circumstances. Where investment strategies and financial products are discussed, they are used for illustrative purposes only. The taxation information and illustrations are based on current law at the time of writing which may change at a future date. Challenger is not licensed or authorised to provide tax, social security or DVA advice and we strongly recommend that the relevant professional advice for individual circumstances be sought about these matters.

Challenger LimitedLevel 25 Martin PlaceSydney NSW 2000Telephone 02 9994 7000Facsimile 02 9994 7777

27784/0817

Adviser contact details

www.challenger.com.au