Lifetime income streams

There are two main types of lifetime income streams:

1. lifetime superannuation pensions, which are purchased from a super fund; and
2. lifetime annuities, which are purchased from a life company with either your super or savings.

Once purchased, the payments from these income streams will last for the rest of your life.

Your rate of Age Pension is calculated using both an income test and an assets test. Not surprisingly, the test resulting in the lowest rate will apply.

Lifetime income streams are different to many other types of investments, such as bank accounts, account based pensions and investment properties, where generally 100% of the asset is assessable.

Certain lifetime annuities receive more favourable treatment from the assets test.

“Under the social security assets test, generally 60% of the purchase price of certain lifetime annuities will count as an asset through to age 84, or for a minimum of five years. From then on, only 30% of the purchase price counts as an asset”, explains Andrew Lowe, Head of Technical Services at Challenger.  “Under the social security income test, 60% of any payment you receive from this type of income stream is assessable as income for social security purposes”.

Don’t miss out on the Age Pension if you don’t have to

Those most likely to benefit from these changes are retirees who receive a part Age Pension because of the assets tests, and who have purchased a lifetime income stream on or after 1 July 2019.

“If you were getting a reduced Age Pension because of the assets test, then investing in a different type of structure on or after 1 July 2019 – like a lifetime income stream – could change your Age Pension outcomes,” he explains.

“In addition to benefiting from a lifetime income stream, they could actually get an increase in Age Pension as well.”

Find out if you’re eligible for more Age Pension

It’s important to speak with a financial adviser about your personal circumstances before making any financial decisions. In some cases, the difference can be significant.

While every situation is unique, Andrew gives the example of a retiree who was able to boost their initial annual Age Pension entitlement from around $14,500 to $19,000 by investing part of their savings in a lifetime annuity.

“That extra $4,500 worth of Age Pension could make a significant difference to their retirement income and how long their retirement assets last,” he says. “It’s not necessarily a dollar or two here and there. It could mean thousands a year in increased Age Pension for a retiree – simply from how they choose to structure their assets.”

Lifetime annuities as a source of income

Using the income generated from a lifetime annuity to complement other sources of income (such as the Age Pension) is a common approach for retirees, says Andrew. “I’d generally see a lifetime annuity complementing other sources of income in retirement. It’s rare to see 100% of anyone’s income coming from one source.”

Making the means test work for you

Here’s how using part of your savings to purchase an eligible annuity as your lifetime income stream might look: Working with your financial adviser, you’d calculate your total spending requirements once you retire, including both essential and discretionary spending.

“Then we work out where that number sits relative to the maximum rate of Age Pension,” Andrew says. “Let’s take a couple who are eligible for the maximum rate of Age Pension – about $36,000. If they can get by on $36,000, they might not need another layer of income. But if they worked out that their essential spending was more than $36,000 – say it’s $40,000 – then they could buy $4,000 worth of additional income a year to get them up to $40,000 through a lifetime annuity to cover their basic living costs for life.”

Because an annuity can offer either a fixed or inflation linked payment, you have the peace of mind of knowing your income will be stable for the rest of your life – no matter how long that is. This is particularly valuable when you want certainty of income without some of the risks associated with other types of market-linked investments.

As Andrew sums up: “Essentially, it’s allocating resources to buy a very secure lifetime income stream, that sits on top of the maximum rate of Age Pension you are eligible for. So, no matter what happens, you can always afford what you need throughout your retirement.”

Important notes: Age Pension benefits described above will not apply to all individuals. Age Pension outcomes depend on an individual (or couple’s) personal circumstances and may change over time. While lifetime income streams may immediately benefit some Age Pension eligible retirees who are assessed under the assets test, in later years, if assessed under the income test, any ongoing Age Pension benefits may be reduced. For market-linked lifetime annuities, only the first year’s monthly income amount is guaranteed. After the first year, monthly payments will move up or down annually adjusting to the changes in your chosen market-linked indexation payment option. In periods of strong market performance, any Age Pension benefits may reduce to reflect the higher income received. Consult your financial adviser about potential impacts on your personal circumstances and whether a lifetime income is right for you.

Next page > Making retirement savings last a lifetime

Previous page > The Age Pension explained