An annuity is a financial product that converts a lump sum into a guaranteed income stream for either a fixed term or for the rest of your life. For Australian retirees seeking certainty in their retirement income — knowing exactly how much they will receive regardless of market conditions — annuities can serve as a foundation of predictable income.
How Annuities Work
You pay a lump sum (typically from super or savings) to an annuity provider. In return, the provider pays you a fixed income — monthly, quarterly, or annually — for:
- A fixed term: e.g., 5, 10, or 20 years
- Your lifetime: payments continue until you die (lifetime annuity)
The key characteristic: the income is guaranteed — it does not depend on investment market performance.
Types of Annuities Available in Australia
Lifetime annuity (longevity annuity)
Pays income for as long as you live. Protects against the risk of outliving your money. Optional features may include:
- Reversionary pension: continues paying to your spouse if you die first
- Death benefit: a lump sum paid to beneficiaries if you die early
- Indexation: payments increase with CPI or a fixed rate each year
Fixed-term annuity (term certain)
Pays income for a guaranteed period (e.g., 10 years). At the end of the term, the residual capital is returned. Useful as a bridge between retirement and full Age Pension eligibility, or to manage specific financial goals.
Market-linked annuities
A hybrid between an annuity and an investment — income varies based on investment returns. Provides some market upside while still providing income. Less predictable than a traditional fixed annuity.
Key Australian Annuity Providers
| Provider | Notes |
|---|---|
| Challenger | Australia’s largest annuity provider; offers lifetime, fixed-term, and market-linked options |
| AMP | Offers lifetime and fixed-term income products |
| Allianz Retire+ | Fixed and structured income products |
| Super fund income streams | Many industry super funds offer pension products (account-based pensions, not traditional annuities) |
General information only. Compare products carefully and seek financial advice before purchasing.
Annuities and the Age Pension Assets Test
A key feature of lifetime annuities under Australian social security rules: from 1 July 2019, only 60% of the purchase price of a qualifying lifetime annuity is assessed under the Age Pension assets test (reducing to 30% after the pension start date’s expected life expectancy). This means purchasing an annuity may improve your Age Pension entitlement compared to holding the same amount in an account-based pension (which is 100% assets-tested).
This interaction makes lifetime annuities particularly valuable for retirees near the Age Pension assets test taper zone.
Pros and Cons of Annuities
| ✅ Pros | ❌ Cons |
|---|---|
| Guaranteed income — not affected by market performance | Loss of capital flexibility (can’t access the lump sum) |
| Eliminates longevity risk (lifetime products) | Returns may be lower than a self-managed investment portfolio in good market conditions |
| Partial Age Pension assets test exemption | Limited inflation protection (unless indexed) |
| Reduces cognitive burden — no investment decisions required | If you die early (lifetime product), the estate may receive nothing (without death benefit features) |
| Eliminates sequence of returns risk | Interest rate environment at purchase date affects the income rate permanently |
How Much Income Does an Annuity Provide?
Annuity income rates depend on:
- Interest rates at the time of purchase (higher rates → higher annuity income)
- Your age at purchase (older → higher income per $1 invested)
- Features selected (indexation, reversion, death benefit reduce income)
- Term (lifetime vs fixed)
A rough indication for Australian market conditions: a 70-year-old may receive approximately 5–7% of the purchase price per year from a basic (CPI-indexed, no reversion) lifetime annuity. This is general only — request a personalised quote from providers.
Annuities vs Account-Based Pensions
| Feature | Lifetime annuity | Account-based pension |
|---|---|---|
| Income certainty | Guaranteed | Variable (investment-linked) |
| Capital access | None (unless special features) | Flexible — can draw lump sums |
| Market exposure | None | Full exposure |
| Longevity risk | Covered | Not covered |
| Age Pension assets test | 60% assessed (qualifying) | 100% assessed |
| Inflation protection | Optional (with indexation feature) | Investment returns may exceed inflation |
| Estate | Via death benefit feature | Remaining balance paid to estate |
Related Articles
- Account-Based Pension Australia
- Retirement Income Strategy Australia
- Investing in Retirement Australia
- Lump Sum vs Pension Retirement Australia
- Retirement Investing hub
Frequently Asked Questions
Are annuities worth it in Australia? This depends on your priorities. If you value certainty of income over flexibility and investment return potential, a lifetime annuity for a portion of your retirement savings may make sense — particularly for its Age Pension assets test benefits. Most financial planners suggest annuities are best used to fund a “base income” floor (covering essential expenses), with an account-based pension for flexibility on top.
How does Challenger annuity work in Australia? Challenger is Australia’s largest life company and annuity provider. You purchase an annuity with a lump sum (from super or personal savings) and Challenger pays guaranteed income for the agreed term or life. Challenger’s products include fixed-term, lifetime, and market-linked options. Speak with a financial adviser for a personalised illustration and quote.
Can I use my super to buy an annuity in Australia? Yes. Super money (both accumulation and pension phase balances) can be used to purchase a qualifying annuity. Super money used this way remains within the superannuation environment — the annuity payments are tax-free if you are age 60+.
This article provides general financial information only and does not constitute a recommendation to purchase any specific product. For advice tailored to your situation, speak with a licensed financial adviser through the ASIC financial advisers register or MoneySmart.