Need to know
- Annuities are one of the options you have for managing your money in retirement
- Annuities are not for everyone, but can be useful if you'd like to get a set amount of income regularly
- You can choose how much money you invest in an annuity – it might just be some of your savings
When we talk about retirement income, there's often a lot of focus on the accumulation stage, where you build up superannuation as you work.
But as the federal government's Retirement Income Review highlighted, there's been relatively little attention paid to the 'retirement phase', where you spend down that income.
The Review also found that retired Australians could enjoy a better lifestyle by making more efficient use of their super -–and without contributing any more money during their working life.
On this page:
- What are the different types of retirement income products?
- What are annuities?
- Lifetime annuities vs fixed-term annuity
- The Age Pension and annuities
- What happens to your annuity when you die?
- Who do annuities best suit?
- Is an annuity right for me?
What are the different types of retirement income products?
We've previously outlined the pros and cons of each of the options you have when you retire.
Most people go into an account-based pension. This option is designed to be simple and flexible. These pensions are effectively the same as the super you had while working, except now you can withdraw money.
You can also withdraw all or some of your super and spend or invest it elsewhere.
A 2023 survey found 44% of respondents weren't sure exactly what an annuity is or how it works
Another option is an annuity, which we'll outline. There's not a high level of understanding of how these products operate – a 2023 survey found 44% of respondents weren't sure exactly what an annuity is or how it works.
Some funds have also started offering new types of longevity products – these are designed to keep providing you with income if you live longer than expected. We'll look at these products in a later article.
Remember that you don't need to take an 'all or nothing' approach. You can put your retirement money in a range of different places if that suits you best.
What are annuities?
Essentially, an annuity is an investment issued by a life insurance company.
You can 'buy' an annuity by paying a lump sum upfront. You then get a set amount of regular income in return. You can choose how often you get a payment, and it can be monthly, quarterly or yearly, depending on your needs.
You can buy an annuity with some of your super or with other savings. If you use your super to buy an annuity and you are over 60, you won't pay tax on the payments you get from it.
Generally, one of the main features of an annuity is that you get a predictable and set amount of income from it. But another option is to buy an inflation-linked annuity. With these products, your payments will vary in line with cost of living changes.
Lifetime annuities vs fixed-term annuity
You can either buy a lifetime annuity or a fixed-term annuity.
With a lifetime annuity, you will get a regular payment for life, no matter how long you live. A fixed-term annuity will pay you for a certain amount of time, for example 20 years.
You can also get an annuity with a guaranteed period. This means if you die during the guaranteed period, the remaining money is paid to your estate.
Another option is a deferred annuity. With these annuities, you don't receive your payments until after the deferral period you set. For example, when you are 65 you might buy a deferred annuity that doesn't pay an income until you turn 80.
This could give you an income after your other savings have run out, especially if the government's Age Pension is not going to be enough for your lifestyle. Usually you can get a discount if you buy the annuity in advance.
The Age Pension and annuities
Buying an annuity or lifetime pension can help you have more retirement income. It can do this by re-organising your finances so you become eligible to either get the Age Pension, or to receive more from the Age Pension.
A lifetime annuity counts as an asset for your Age Pension eligibility. It's important to work out how buying a retirement product will impact your payments, though calculating exactly how much of it will count (and whether this impacts how much Age Pension you get) can be complex – a Financial Information Service (FIS) Officer can help you with this; you can contact this service on 132 300.
Remember that the Age Pension will continue providing you money, no matter how long you live
"There are real advantages in having that regular income just coming in," says David Knox, senior partner at Mercer. "If people want that guaranteed income, yes, they might pay a bit for it, but if that means they can sleep a lot better at night, that's a good thing."
Annuities might be marketed as a way to avoid 'running out of money'. But remember that the Age Pension will continue providing you money, no matter how long you live. Even if you aren't eligible for the Age Pension when you first retire, you could be eligible after you have spent down some of your savings.
"The Age Pension is the ideal annuity," says Knox. "It is guaranteed by the government, it is indexed, it is payable for life, and it won't ever be taken away from you."
What happens to your annuity when you die?
When you buy your annuity, you can choose what happens to the payments after your death.
One option is a reversionary beneficiary. This option means a person you nominate (such as your partner) will continue getting income from the annuity for the rest of their life, usually at a reduced level.
You can also choose a guaranteed period. With this option, you set a minimum period when you buy the annuity. If you die before this time ends, the annuity provider pays the person you nominate to receive your remaining payments, either as a lump or a regular income stream.
Superannuation law requires the death benefit to decline over time to zero
Initially, some people were put off annuities because they were concerned they would lose their initial investment if they died early. Now, most annuities offer a death benefit, which is a refund of up to the full initial amount you paid for the annuity if you die early. However, super law requires the death benefit to decline over time to zero so if you outlive your life expectancy, the annuity won't pay any death benefit to your estate.
You can also choose not to have a death benefit in exchange for getting more income in your regular payments.
An annuity might be attractive if you want more certainty around your retirement income.
Who do annuities best suit?
Annuities might be pitched as a protection against 'running out of money' if you live a long time and use up all your super and other savings. However, it's important to remember that, assuming you're eligible, the Age Pension will continue to provide income no matter how long you live.
An annuity might be attractive if you want more certainty around your retirement income.
An annuity can help increase your retirement income, either by providing more income than other investments like bank accounts or by increasing the amount of Age Pension income you get.
David Knox says that generally, buying an annuity "is only part of the answer".
"Most people would take an account-based pension, which gives them flexibility and exposure to the investment markets depending on their risk profile. But an annuity would also give them guarantees going forward in terms of their unknown life expectancy."
Is an annuity right for me?
The answer to this question will depend heavily on your individual circumstances, including factors like how much super and other savings you (and your partner, if applicable) have and whether you own your own home.
"There is no one answer [to who an annuity will suit]," says Knox. "People must think about their personal situation, health, wealth, and expectations of retirement."
Knox says that generally, annuities offer the most value to retirees in the 'middle'. He says these products might be less suited to those with relatively modest savings who will get most of their income from the Age Pension, or those who have enough money that they will never run out.
Generally, annuities offer the most value to retirees in the 'middle'
Similarly, super fund Australian Super has suggested its "mid-wealth cohort" could benefit from allocating some of their super to a longevity product such as an annuity.
"Annuities can make sense for people who want a predictable income and expect to live for a long time," says Brad Ruting, retirement researcher at Super Consumers Australia.
"But they can be poor value for people with lower levels of wealth or those who are not in good health and who may not live as long as the average life expectancy."
It's important to note that annuities aren't designed to be flexible and it may be hard to take your money out as a lump sum if you need it. Your money is typically 'locked in' to the annuity until it ends.
Annuities are (generally) shielded from the market
Generally, your super (including an account-based pension) will be invested in a range of assets, like property, cash and shares. How much you earn will depend on how the market does. In contrast, an annuity will pay you the same no matter if the market surges or crashes.
There is a newer type of annuity where the income you get varies in line with the performance of certain investment markets. These are called investment-linked annuities. There are now also annuities that vary how much you get when the Reserve Bank changes the cash rate.
Getting free, independent advice on retirement products
There's currently no quality filter or comparison tool for annuities in Australia. In the UK, consumer group Which? found that shopping around for an annuity could increase your retirement income by up to 20%.
More generally, your super fund can give you information about their retirement products and how they work – this guidance is generally free, at least for an introductory advice session.
But there are limitations to this advice – funds can't compare their product with those offered by other funds or give you comprehensive advice that takes in your broader financial situation and needs in retirement. See our road-test of the advice from super funds.
In the UK, consumer group Which? found that shopping around for an annuity could increase your retirement income by up to 20%
The Financial Information Service (FIS) can give you free advice over the phone to help you make informed decisions about your retirement options and assist you with understanding super, income streams and annuities.
In the long term, a free and independent guidance service to help all Australians with their retirement planning could help people make better decisions about their retirement.
Super Consumers Australia has advocated for this type of service, which has proved successful in the UK.
This content was produced by Super Consumers Australia which is an independent, nonprofit consumer organisation partnering with CHOICE to advance and protect the interests of people in the Australian superannuation system.
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