Answer by Julia Savage of Newcastle Legal, Hamilton NSW 2303

• Annuities (also referred to as income streams) are an attractive option where a testator wants to provide for a beneficiary but does not want to give them a large lump sum.
  • An annuity may be used where the beneficiary needs a regular source of income but may be frivolous with a lump sum for example a young adult or someone unaccustomed to handling large sums of money.
  • An annuity may also be used where a partner is to be provided for in life and when they die the remaining funds are to go to a different beneficiary such as a child from a previous relationship.
  • It is important to note that annuities complicate the administration of an estate. This of course will increase the costs of administration such as adding to accountancy and legal costs.
  • An annuity may also affect your partner’s ability to claim a pension after you die and there may be taxation implications.
  • You would also need to ensure that your executors have the right powers under your will to purchase a commercial annuity if that is the type of annuity you are considering.
  • With an annuity that is paid from a nominated fund in your estate you will need to ensure that it does not conflict with the distribution of the residue of your estate.
  • You should also ensure that the annuity returns a rate that you expect as commercial annuities often give a lower rate of interest than other investments.
• A lump sum payment is a less complicated option. It gives the beneficiary freedom to use the funds when and where they like.
  • A lump sum releases the estate and your executors and trustees from long-term commitments. This is a substantial cost saving to the estate especially if your executor or trustee is a corporate company that charges a fee for their services.
  • A one-off inheritance payment that will not be repeated, cannot be reasonably predicted and does not represent payment for services is exempt from the income test and asset test in relation to eligibility for a pension.
  • However the way that money is used may affect either the income test or asset test.
  • For example if the money is used to pay off a beneficiary’s mortgage over their family home it will not affect the asset test but if the money is used to purchase an expensive artwork or income producing asset then it will affect the asset and income tests.
  • This may detrimentally affect your partner’s eligibility for a pension.

• It is essential that you seek financial and legal advice before you decide which option to take.
• There are many different ways to achieve want you want and any decision must be tailored to your specific circumstances.