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SMSF trustees cautioned on large annuity allocations

While annuities can provide low-risk, steady return in a diversified portfolio, one adviser has expressed concern about liquidity being compromised where a portfolio has excessive allocation to annuities.

Speaking to nestegg.com.au’s sister publication SMSF Adviser, Visis Private Wealth partner Chris Smith said although there are many benefits to investing in an annuity, such as security around investment capital, SMSF practitioners need to ensure their clients are aware annuities can potentially be inflexible given that they are usually for a fixed term.

“You have to evaluate a balance between locking all your capital into an annuity versus all the other requirements for which you might need an SMSF in terms of emergency funding or health issues,” said Mr Smith.

“Also, there’s an opportunity cost that you’re missing out on by having a diversified allocation and a mix of investments.”

Given that the actuaries working for the annuities provider have done all the calculations, investors are paying for certainty and paying for guaranteed returns so therefore SMSF trustees are likely to get a lower return on capital because it tends to be lower risk.

“Therefore, it’s going to give you a lower yield of return than you would otherwise get with some of your other investments,” Mr Smith said.

SMSF trustees cautioned on large annuity allocations
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