An annuity is a financial product that converts a lump sum of money into a guaranteed income stream. In Australia, annuities are primarily purchased by retirees using super or other savings to provide reliable income that cannot be outlived (lifetime annuities) or for a set period (fixed-term annuities).
Types of Annuities in Australia
1. Lifetime Annuities
A lifetime annuity provides income for the rest of your life, regardless of how long you live. Key features:
- Income payments are guaranteed for life — you cannot outlive the payments
- The insurer assumes the longevity risk (risk of living longer than your money lasts)
- Once purchased, the capital is generally not accessible (exchanged for the income stream)
- Can include inflation indexing (CPI-linked or fixed annual increase) or a death benefit period (payments continue to estate for a period if you die early)
Providers in Australia: Challenger Life (Australia’s dominant provider), RetireAus, Resolution Life.
2. Fixed-Term Annuities
A fixed-term annuity provides income for a set number of years (e.g., 5, 10, or 15 years). At the end of the term, a residual capital value may be returned. Features:
- Guaranteed income for the chosen term
- No longevity protection beyond the term
- More flexible — can be used as a “bridge” to Age Pension or pension phase access
How Are Annuity Rates Set?
Annuity payment rates depend on:
- Your age at purchase (older = higher payments as life expectancy is shorter)
- Interest rates at time of purchase (higher rates = better annuity rates)
- Options selected: Indexing, death benefit period, reversionary beneficiary reduce the base payment
Annuity rates are quoted as an annual income per $100,000 invested. In recent years as rates rose, annuity payouts improved significantly.
Centrelink Assessment of Annuities
Annuity income and the purchase price (capital value) are assessed differently for Centrelink Age Pension:
Lifetime Annuity — Post 1 July 2019 (New Rules)
Under the 2019 Retirement Income Covenant reforms:
- Income test: 60% of annuity payments are assessed as income (down from 100%)
- Assets test: 60% of the “deductible amount” is assessed as an asset (complex calculation, generally reduces over time)
The favorable treatment encourages longevity protection products.
Fixed-Term Annuity
- Income test: Assessed based on the portion of payment that represents earnings (not return of capital)
- Assets test: Residual capital value assessed as an asset
Advantages of Annuities
- Certainty: Guaranteed income for life (or fixed term) regardless of markets
- Longevity protection: Cannot outlive payments with a lifetime annuity
- Sequencing risk mitigation: Base income from an annuity reduces reliance on selling growth assets in market downturns
- Centrelink benefit: Under the current rules, lifetime annuities may improve Age Pension entitlements
Disadvantages and Risks
- Inflexibility: Capital is generally inaccessible — not suitable for all your savings
- Inflation risk: Unless indexed, fixed payments lose purchasing power over time
- Opportunity cost: If markets perform well, you may have been better off in a growth portfolio
- Insurer default risk: Although low, the insurer’s capacity to pay is a long-term risk (APRA-regulated; the Life Insurance Act provides protections)
Who Should Consider an Annuity?
Annuities may be worth considering if you:
- Want a guaranteed income floor (combined with super pension drawdown)
- Are concerned about longevity risk (family history of long life)
- Want to simplify retirement income management
- Are approaching 75–80 where flexibility matters less than certainty
For advice on whether an annuity suits your retirement income strategy, speak with a licensed financial adviser via MoneySmart. For more: Sequencing Risk, The Bucket Strategy, Account-Based Pension Guide.