An annuity, also known as a lifetime or fixed-term pension, gives you a guaranteed income for a number of years. Or the rest of your life.
An annuity is less flexible than an account-based pension, but you can be sure about your future income.
How an annuity works
You can use your super or savings to buy an annuity from a super fund or life insurance company.
When you buy an annuity, you choose whether you want the payments to last for:
- a fixed number of years
- your life expectancy, or
- the rest of your life
Preservation age
If you are using super money to buy an annuity, you must have reached preservation age (between 55 and 60).
You must also meet a condition of release, such as permanently retiring.
Joint or individual annuity
You can use savings to buy an annuity in joint names. This allows income splitting for tax purposes. If you or your partner dies, the survivor has ownership and access to the funds.
If you use a super lump sum to buy an annuity, it can only be in the name of the person who 'owns' the super.
Income from an annuity
You decide the payment amount you receive when you buy the annuity. Your annuity income can increase each year by a fixed percentage, or indexed with inflation.
You can choose to be paid monthly, quarterly, half-yearly or yearly.
An annuity bought with super money must pay you a certain percentage of the balance, based on your age. The Australian Taxation Office website has more information about minimum annual payments.
Your annuity if you die
When you buy an annuity you can either nominate a reversionary beneficiary or choose a guaranteed period option.
- Reversionary beneficiary — Your nominated beneficiary (usually your partner or a dependant) will get your income payments for the rest of their life. This is usually at a reduced level, for example, 60% of your income stream.
- Guaranteed period — A minimum payment period is set when you buy the annuity. If you die, your beneficiary will get your payments, either as a lump sum or income stream. The income payments will not reduce.
How an annuity affects the Age Pension
An annuity forms part of the income and assets tests to determine your eligibility for the Age Pension.
A Services Australia Financial Information Service (FIS) officer can help you work out how an annuity will affect your Age Pension entitlement.
The difference between an annuity and an account-based pension
Share market performance doesn't affect annuity returns. This makes an annuity one of the more stable retiree investment options.
With an account-based pension, your money is invested in a range of investments, including shares, property and bonds. This gives potential for better growth and investment performance. Share market performance does affect returns, making an account-based pension riskier than an annuity.
Pros and cons of an annuity
Consider the pros and cons to decide if an annuity is right for you. Get financial advice from your super fund or a licensed financial adviser if you need more information.
Pros
- A regular guaranteed income regardless of how share markets perform.
- Suitable for someone who doesn't want to bear investment risk.
- An annuity bought with super money is tax-free from age 60.
- An indexed annuity protects you from the rising cost of living.
- Payments from a lifetime annuity will last as long as you do.
- If you nominate a reversionary beneficiary, a spouse or dependent will receive some income if you die.
- If you choose a fixed-term guarantee period, your estate gets some money if you die during that time.
Cons
- You cannot choose how your money is invested.
- Income payments will be low if the annuity starts in a period with low interest rates.
- You can't change the amount you receive in income once payments start.
- You lock your money away until the term of the annuity ends.
- You cannot withdraw your money as a lump sum.
Using a mix of retirement income options
You don't have to take an all or nothing approach to your retirement income. You may benefit from a mix of options, such as an annuity, account-based pension or lump sum.
Consider your personal needs and circumstances before making a decision. Your super fund, a licensed financial adviser or a Financial Information Service (FIS) officer can help.