Annuity Quotes Will Vary
Sydney Morning Herald
Tuesday July 23, 1996
QUESTION: I always read your articles in Money and note a recent letter to a 73-year-old widower to whom you recommended an annuity. My situation is similar, but my adviser quoted different figures.
ANSWER: Annuity quotes vary between companies and change every week in line with long-term interest rates. I used Norwich in the example you mention. At the time, its rates for a $100,000 annuity for a 73-year-old male were $12,824 a year if there is no increase in payments and $9,713 a year if the payments are indexed to CPI - an effective annual rate of return of 9.58 per cent. The tax-free portion in each case is $9,624, which is the investment of $100,000 divided by the life expectancy of 10.39 years. The more frequent the payments, the lower the return. My example uses quarterly payments.
QUESTION: I have just had a custody settlement and need to plan for myself and my child. I am 43, have a two-year-old daughter and earn $44,000 a year. I owe $72,000 on my home and am paying it back at $400 a fortnight. I will have to replace my car in a few years. My only major expense is $100 a week child care after allowances. My goal is to send my child to a good secondary school, which will cost at least $40,000. Should I focus on paying off the mortgage or start a scholarship scheme to provide for the school fees?
ANSWER: In your situation you have to be cautious, but at the same time get the most effective return on your limited capital. This is why I favour speeding up the payments on your housing loan. Every dollar you invest there will return you the equivalent of 10 per cent per annum after tax with no risk. At your present rate of repayments you will have the loan paid off in 12 years. If you can raise the payments to $500 a fortnight, the term will fall to eight years and your loan will be paid off when your daughter is 10, giving you at least four years to build capital for her education.
Noel Whittaker is a Brisbane-based independent investment adviser. If you have a question, write to ANSWERS, c/o Money, The Sydney Morning Herald, PO Box 506, Sydney 2001.
© 1996 Sydney Morning Herald
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