Following our discussion on strategies to boost your Age Pension, it is worth examining an option that receives particular attention from the government: the lifetime annuity (often referred to as a lifetime income stream or lifetime pension).
While the concept of an annuity can spark debate among financial experts, its potential to increase your fortnightly pension payment is a deliberate feature of the Australian social security system, designed to help retirees manage the risk of outliving their savings.
Here is a straightforward look at how these products are assessed and why they might appeal to those looking to secure their retirement income.
What Exactly is a Lifetime Annuity?
At its most basic, an annuity is a financial product you buy using your superannuation or other savings, typically from a life insurance company or a friendly society. You exchange a lump sum of money for a guaranteed stream of income.
As the name suggests, a lifetime annuity guarantees these regular payments for the rest of your life, regardless of how long you live or how financial markets perform. This offers a level of certainty that an account-based pension, which fluctuates with investment returns, cannot provide.
Careful financial planning in retirement. Source: Jelena Danilovic / Getty Images
How Centrelink Views Your Annuity
The reason annuities frequently appear in discussions about maximising the Age Pension is due to how Services Australia assesses them.
To encourage Australians to establish a reliable income for their later years, the government introduced favourable rules for lifetime income streams purchased after 1 July 2019. Instead of counting the full value of the annuity towards your assets and income tests, Centrelink applies a significant discount.
The Assets Test Advantage
When assessing your assets, Centrelink does not count the total amount you used to buy the lifetime annuity.
- The 60% Rule: Initially, only 60% of the purchase price is counted as an asset. For example, if you purchase an annuity for $100,000, Centrelink only assesses $60,000 of it.
- The 30% Drop: Later in life, on a date known as the ‘threshold day’, the assessable amount drops even further to just 30% of the purchase price. For annuities purchased from 1 January 2025 onwards, the threshold day is generally age 85 (it was age 84 for annuities purchased before that date). The threshold day is actually the later of two dates, a minimum five year period from purchase, or a date set with reference to life expectancy, so younger purchasers may find their threshold day falls somewhat later than age 85.
By immediately sheltering 40% of the invested capital from the assets test, a lifetime annuity can help push your total assessable assets below the cut-off thresholds, potentially turning a part-pension into a full pension, or helping you qualify for a part-pension where you previously received nothing.
The Income Test Advantage
A similar discount applies under the income test. Centrelink only assesses 60% of the regular income payments you receive from your lifetime annuity. The remaining 40% is ignored, giving you more room under the income thresholds before your Age Pension is reduced.
Weighing the Pros and Cons
While the immediate boost to your Age Pension and the promise of a guaranteed income are appealing, it is essential to consider the trade-offs.
The Benefits:
- Guaranteed Income: You receive a regular income that lasts as long as you do, offering peace of mind.
- Pension Boost: The favourable assessment rules can increase your Centrelink entitlements.
- Market Protection: Your income is not subject to the ups and downs of the stock market.
The Drawbacks:
- Loss of Capital: You generally cannot access the lump sum once the initial cooling-off period ends. The money is locked away, limiting your flexibility if you encounter unexpected expenses.
- Lower Returns: The income payments from an annuity might be lower than the potential returns you could earn if you invested the money yourself.
- Inflation Risk: If you do not choose an annuity that is indexed to inflation, the purchasing power of your regular payments will decrease over time as the cost of living rises.
Finding the Middle Ground
Because of the rigid nature of annuities, they are rarely used as a complete retirement solution. A common strategy is to adopt a blended approach.
For instance, you might use a portion of your savings to buy a lifetime annuity to cover your essential, non-negotiable living expenses, while keeping the rest of your money in a flexible account-based pension to fund holidays, home repairs, or medical bills.
Before committing a significant portion of your savings to an annuity, it is highly advisable to seek guidance from a qualified financial professional to ensure it aligns with your long-term goals.
