What’s an annuity?

An annuity is a product that provides you with a guaranteed income in retirement, regardless of how markets perform. We check out the pros and cons.

For a lot of Australians, superannuation is a major source of income in retirement, next to the government’s Age Pension, if you’re eligible for it.

For this reason, what you do with your super savings will require some serious thought, particularly with many Australians looking at a retirement of 30 years or more.

If you’ve been wondering how annuities fit into the picture—while they only make up a small part of Australia’s retirement income market1—they do have benefits and risks worth exploring.

How do annuities work?

An annuity provides a series of regular payments over a set number of years, or for the remainder of your life, depending on whether you opt for a fixed-term or lifetime annuity.

The payments you receive depend on factors, such as the amount you put in and actuarial calculations, which look at economic and demographic assumptions to estimate future liabilities.

Generally, annuities are a secure option, as they provide a guaranteed income in retirement, regardless of what’s happening in financial markets.2

Meanwhile, you can purchase an annuity with super and/or ordinary savings, but generally you can't access your super until you reach preservation age, which will be between 55 and 60, depending on when you were born.

What are the benefits and risks?3

Annuity benefits

  • You receive a guaranteed fixed income, regardless of movements in the share market.
  • You can choose for your regular payments to keep pace with inflation.
  • You can typically choose to receive regular payments monthly, quarterly, half-yearly or yearly.
  • If it’s a lifetime annuity, you remove the worry of outliving your savings.
  • Any income you receive from an annuity you purchase using your super money is tax free from age 60.
  • Income from certain annuities may receive beneficial Centrelink treatment.

Annuity risks

  • You may have limited or no access to lump sums of money.
  • You may underestimate life expectancy with a fixed term annuity, so money may run out.
  • You might not be able to transfer your annuity money to another pension product.
  • In the long run, an annuity might pay lower returns than a market-linked investment.
  • Depending on the annuity type, little or no benefit may be payable to your beneficiaries.

Can an annuity affect the Age Pension?

It is possible that your eligibility for the Age Pension could be affected depending on the type of annuity you choose.

That’s because what you’ve invested and what you receive as income from an annuity will be assessed under Centrelink's income and assets tests, which determine how much you’re eligible for, if anything.

Do note however that certain types of annuities will receive favourable treatment under the Centrelink income test, so it's worth looking into.

What other options do I have?

Take some or all of your super as a lump sum

Taking your super as a lump sum can be tempting however it won’t be the best option for everyone and there may be tax implications to consider if you withdraw it under age 60.

You need to think about whether you’re going to spend or invest this money, and what you’ll live on if you have minimal or no super left. While you could be eligible for government entitlements, like the Age Pension—alone, it’s unlikely to be enough.4

Move your super into an account-based pension

An account-based pension (or allocated pension) provides you with a regular income stream drawn from your super savings and you can withdraw lump sum amounts.

Returns are tied to movements in investment markets. And, as an account-based pension is based on the super you’ve saved, it doesn’t guarantee an income for life. Meanwhile, your pension’s investment earnings are tax-free as are income payments from age 60.

Is an annuity right for me?

You may want to meet with your adviser to determine what’ll work best for you. If you don’t have an adviser, our find an adviser tool can help you locate one nearby.

We also have super and retirement calculators that can help you to access your super.

1 DEXX&R Market Projections Report released 30 November 2015
2, 3 ASIC's MoneySmart website - annuities
4 ASFA's Retirement Standard

Interested in annuities?

AMP has broadened its retirement offer, with customers now able to access a range of Challenger annuities through their adviser.

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© AMP Life Limited. This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.