What is a lifetime income stream?

Would one suit you?

Most retirees would be happy to know their income was guaranteed for life. But unless you are one of the handful of Australians with untold wealth, this isn’t always possible. There are products you can purchase to ensure a regular income for the rest of your days. But there are trade-offs with these products as well. Today we consider the pros and cons of lifetime income streams to help you decide if they would be ideal for your situation.

Before we move into a definition of this form of income stream, it’s worth noting that the Age Pension remains the ultimate lifetime income stream for most retirees. It is a government-guaranteed, inflation protected payment that delivers income to the majority of older Australians. Starting by knowing your possible eligibility and ensuring that you maximise this entitlement is a fundamental first step for all retirees.

The reason why a lifetime income stream sounds so attractive is that it tackles head-on the most common fear for most retirees. The fear of running out. As we’ve indicated previously, the safety net of the Age Pension means no one should ever ‘run out’. But lifetime income streams do ensure that the roller coaster income ride is smoothed, to an extent. 

What are they?

Previously called annuities, these income streams are now more commonly known as lifetime pensions or lifetime income streams. Purchasing such a product provides you with a guaranteed income for a number of years. Or the rest of your life.  Some super funds are also now offering them.  They can also be referred to as longevity products, as they typically provide a pre-determined income for life, no matter how long you live. 

How do they work

At retirement retirees who are also of Preservation Age are able to use some of their superannuation to purchase a lifetime income stream.  (You may also use private savings to purchase a lifetime income stream, but this can be treated differently by Centrelink). You will then receive a regular payment for your entire life, regardless of how long you live. This can be a great option for those who are in good health and whose family tends to live a long time.  Many lifetime income streams also offer the following options:

• Choice of a guarantee period/death benefit. This means that, if you die during the guarantee period/death benefit period, the balance of your income stream is paid to your estate.
• If you have a partner you can choose a Reversionary Beneficiary. Your nominated beneficiary (usually your partner or a dependant) will get your income payments for the rest of their life.
• Your income stream can be linked to CPI or pay a fixed percentage of investment 
• It can also be linked to investment markets in order to have some exposure to growth assets.
• You can nominate the amount and frequency of payments i.e. be paid monthly, quarterly, half-yearly or yearly (note however, that an annuity bought with super money must pay you a certain percentage of the balance, based on your age).

On the face of it, there’s a lot to like about lifetime income streams. Here’s our summary of the upsides of these pension products.

Pros 

• Provide guaranteed income for the rest of your life, regardless of how long you live.
• Returns are based on average life expectancies, so if you live longer than the average person, you’ll receive more in total payments.
• From age 60, the income from annuities/lifetime income streams purchased using super money is tax free.
• These products can be used to supplement other retirement income streams (including the Age Pension and Account-Based Pensions).
• They provide a predictable cash flow so you can cover those essential expenses and feel more comfortable with discretionary spending decisions.
• They also may provide an increase in your Age Pension entitlement (see Centrelink rules below).

But as with most good things in life, there are trade-offs. Here are some of the restrictions attached to lifetime income streams and how they might affect your retirement income.

Cons

• You cannot choose how your money is invested.
• Income payments will be low if the annuity/lifetime income stream starts in a period with low interest rates.
• You can’t choose to change the amount you receive in income once payments start.
• You will be effectively locking your money away until the term of this income stream ends.
• You cannot withdraw your money as a lump sum unless you have chosen a guarantee period. In this case you may have the option of closing the annuity during that time period and receiving a reduced amount.
• You may be able to achieve higher returns outside an annuity, although, of course, this may involve more risk.
• Generally there is nothing left to leave to your estate.
• Lifetime income streams are generally less flexible than an Account-Based Pension

How Centrelink treats Lifetime income streams

From 1 July 2019, the Age Pension rules for assessing a lifetime annuity (not a term annuity) purchased from that date were changed. 

• Under the Assets test 60% of the Purchase price is counted until the life expectancy of a 65-year-old male (currently 84, or a minimum of 5 years if purchased around age 84), and then 30% of the purchase price for life.  
• Under the Income Test 60% of the Annual payment is counted.

Some common FAQs on Lifetime income Streams

Q. Do I have to put all my superannuation money in to start a lifetime income stream?

Alison answers:

No, this is not the case, it is actually better to put a small percentage of your total superannuation into an annuity to complement Age Pension payments and income from an Account-Based Pension.

Q. Is there a risk to my money because I have put it into one annuity policy?

Alison answers:

No, this is incorrect. Life companies that issue annuities and lifetime income streams are supervised by the Australian Prudential Regulation Authority (APRA), which requires them to hold sufficient capital today to be able to make all payments to the annuity holder in the future. 

Q. Is a lifetime income stream the same as an Account-Based Pension?

Alison answers:

This is a common misunderstanding. No, an Account-Based Pension (or Allocated Pension) differs in the following ways:

• It is not guaranteed
• It allows you to withdraw lump sums if you need 
• It is required to pay a specific percentage of the balance based upon your age and depending on how it is invested (or how much is invested) and 
• It may not last for your lifetime. 

Account-Based Pensions tend to be invested in a range of investment assets like shares, cash, property, bonds. As such, they, and your returns, are subject to market fluctuations.

Is this for you?

In summary, there are many positives associated with smoothing out the ‘bumps’ in retirement income by purchasing a lifetime income stream. But as noted above, there are trade-offs as well and these need to be taken into account before committing a part of your savings – be it super or private – to this form of pension.

The team at Retirement Essentials has done a lot of research on how such products can work well in tandem with other income streams such as the Age Pension and your Account-Based-Pension.   Our team can work with you in a number of ways including

1. Project your needs using the Retirement Forecaster

2. Learn more about ways to manage your super in retirement

3. Maximising your Centrelink Entitlements  

What do you think?

Did you find this explanation helpful? We’d love to hear your thoughts on the pros and cons of these retirement income products. Are they a good use of super?

This article is provided by Retirement Essentials Representative Number: 001260855. We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859. This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.