Lifetime income streams: Do they guarantee money for life?

If you’re a 65-year old male reading this article you stand a good chance of living until at least 85.3 years. If you’re a female of the same age, you’re likely to get more than 20 years, with life expectancy of 88 (Australian Institute of Health and Welfare). Half of those reading (who are 65) will last even longer. Hopefully this means 20-plus years of health and fulfilling activities ahead.

Long life is great news, but many people often grapple with this concept of longevity as they worry how they might stretch their funds to cover these decades. As you will be well aware there are many different ways of accessing your super and private savings to support your needs in retirement. But working out the pros and cons of the different ways of withdrawing super can feel challenging. Today we discuss the various aspects of ‘lifetime income streams’ and how they can be used as part of your retirement funding mix.

What is a lifetime income stream?

Lifetime income streams are designed to provide a regular, reliable income payment for the rest of your life.  They have previously been offered by life insurance companies but some superannuation funds are now designing them or offering them under a ‘white label’ (reseller) agreement.

Is this the only way to get guaranteed lifetime income?

The newer style products have many positive features, which we look at in more detail below. But it’s important also to consider the wider retirement income offerings. Previously many employees, in particular those who worked for a state, territory or the Commonwealth Government would receive a Defined-Benefit Pension which is typically a guaranteed amount (often a percentage of your former salary) for as long as you live. These are sometimes referred to as ‘rolled gold’ pension funds for obvious reasons. They have largely been phased out for new entrants to the workforce, particularly since the introduction of compulsory super.

Another form of guaranteed retirement income, of course, is the Age Pension entitlement. Technically it is not ‘guaranteed’ as you need to remain eligible to receive your fortnightly payments and these can change as your income or assets rise or fall. But whilst you are eligible, you can rely upon this income stream, and plan around it.

How do Lifetime Income Streams differ from Account-Based Pensions?

The key difference is that Account-Based Pensions generally rely upon your super fund returns to inform your potential payments. Many people (assuming they have reached Preservation Age) will put all or part of their super into an account based pension account (ABP) which makes regular payments, so that they have a ‘wage’ in retirement. These payments can continue as long as there is money in your ABP.

A lifetime income stream involves a conscious decision to purchase this product from a super fund or insurance company. It also involves the decision to buy the product for the rest of your life, regardless of how long you ultimately live. Some lifetime income streams or annuities are linked to inflation (measured by the Consumer Price Index), others are ‘market-linked’ or ‘indexed’ to investment performance. Pricing also varies, both in the way the provider may charge you and what is happening with CPI and market indexes at the time. 

What are the pros and cons?

We’ve previously covered some of the main pros and cons of these long term streams of income. They tend to suit those retirees who want a higher level of certainty than that which is offered by their private savings or their Account Based Pension. Some retirees will receive an Age Pension and use an annuity or similar to ‘top up’ their current payments. Some will have an Age Pension, an Account Based Pension and a lifetime income stream. It depends very much on your individual circumstances and the strategies you can use to maximise your savings and assets.  One often over-looked aspect of lifetime income streams is that the security of a defined payment over an extended period of time (or the rest of your life) can sometimes allow the recipient to relax and spend more than they may otherwise have done. 

How do you buy a lifetime income stream?

As you will have gathered, there are quite a lot of decisions involved in accessing this form of income, including which product, how long for, how much you hope to be paid and death benefits for a surviving spouse. Most such products are made available through adviser networks as they need careful explanation. It is quite difficult to compare these products on an ‘apples with apples’ basis as many offer different investment options, different fee structures and more or less flexibility. You could start by discussing this with your super fund to see if they offer such a product. And if not, which company’s product they would suggest you consider. 

How does Centrelink view this income?

The lifetime income streams receive a partial ‘discount’ when it comes to Age Pension eligibility. For those that commence on or after 1 July 2019, the rules will generally assess: 60% of the purchase price of the lifetime income stream until age 84, subject to a minimum of 5 years; and. 30% of the purchase price thereafter. Read the full detail on Centrelink assessment here.

You can also read more detail about these income streams on the government’s Moneysmart website. If you are already receiving a full Age Pension you won’t receive any further Centrelink benefits from holding one of these products.  Part pensioners and those not currently eligible for the Age Pension (due to assets or income) could see some benefits.  One of our Retirement Forecaster appointments can help you understand the Centrelink benefits from investing in these types of products. 

How Retirement Essentials can help

To better understand how a lifetime income stream could fit into your retirement planning you could book a retirement forecaster appointment.  Our advisers can help you to understand the various advantages and disadvantages and outline what your options are to use your super or savings to set up a lifetime income stream. 

What’s your view of these products? 

Would they give you more confidence to spend? 
Or are they not for you?