Annuities

Get a guaranteed income

An annuity pays you a guaranteed income for a set period of time. You can choose whether you want the payments to last a lifetime or a fixed number of years. Unlike other retirement phase income products, annuities give you certainty, you know how much you'll get and how long it will last.

How annuities work

You can buy an annuity (also known as a lifetime or fixed-term pension) from a super fund or life insurance company with a lump sum from your super or other savings. If you're using super money you must have reached your preservation age and met a condition of release.

How much income will I receive from an annuity?

The income you will receive is fixed when you purchase the annuity, however it can be indexed each year, either by a fixed percentage or in line with inflation.

How often are annuity income payments made?

Income payments can usually be made monthly, quarterly, half-yearly or yearly.

How long do income payments last?

When you purchase the annuity you will choose whether you want the payments to last for the rest of your life, your life expectancy or a fixed number of years.

What happens to my annuity when I die?

If you nominated a 'reversionary beneficiary' then the income stream payments will continue to be paid to your nominated beneficiary, such as your spouse or dependant. Usually they will receive a reduced level of income payments from what you received. For example if you bought an annuity and nominated your spouse as the reversionary beneficiary, they might continue to receive 60% of your income for the rest of their life, after you have passed on.

Alternatively, you can choose the guaranteed period option. If you die within the specified guaranteed period, your beneficiary will receive the remaining income payments as an income stream or lump sum. Unlike the reversionary beneficiary option, the income payments received under a guaranteed period will not reduce and are only paid for the guaranteed period.

Will I qualify for the Age pension if I receive income from an annuity?

Your Age pension entitlement is determined by an income test and an assets test. The balance of your annuity will be assessed under the Centrelink assets test. Part of the income you get each financial year will be assessed under the income test. The test that results in the lowest Age pension being paid to you is the one that Centrelink will apply. Contact a Department of Human Services' Financial Information Service (FIS) officer to find out whether an annuity will affect your Age pension entitlement. See social security for more details.

New transfer balance cap

On 1 July 2017 a cap was put on the amount of money can be transferred to a tax-free account-based pension or annuity. The new limit is known as the 'transfer balance cap' and it has initially been set at $1.6 million. Details of the changes can be found on the Australian Tax Office (ATO) website.

Benefits of annuities

An annuity is a way of receiving a regular guaranteed income after you have retired from work. Benefits include:

  • You are paid a guaranteed income regardless of how markets perform
  • Annuities purchased with super money are tax free from age 60
  • Annuities purchased with super money before age 60 will have the taxable portion taxed at your marginal tax rate, however, you will receive a 15% offset.
  • Only the income component (if any) of an annuity purchased with non-super money is taxable
  • You don't pay tax on investment earnings
  • Income payments can be set to increase annually at the time the annuity is purchased

Case study: Peter chooses a lifetime annuity with a guaranteed period

Older Man Beach Arm Up

Peter is 65 and married. He invests $200,000 in an annuity which will pay him a regular income of $800 each month, increasing with inflation each year, for the rest of his life. Peter likes that the annuity has a 15 year guaranteed period, which ensures his wife Christine will receive his income payment for a while should he die during that period.

Drawbacks of annuities

There are a couple of things to be aware of before you start an annuity:

  • You cannot take out your money as a lump sum
  • You cannot choose how your money is invested
  • You may not be able to transfer it somewhere else if you change your mind
  • Over the long term, an annuity may pay less than a market-linked investment

An annuity is a good choice if you want the security of a guaranteed income for a certain period of time. Seek financial advice from a licensed adviser if you're not sure if this is the right choice for you.


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Last updated: 01 Jul 2017