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In its simplest form, an annuity provides you with a guaranteed, regular income for a fixed period or for the rest of your life. While annuities can offer more certainty than account-based pensions, they’re generally less flexible.

How do annuities work in retirement?

You can use your super or personal savings to buy an annuity. When you purchase one, you pick whether payments last for a set number of years or for life. If you’re using super, you must have reached your preservation age and met a condition of release—such as full retirement.

What types of annuities are available?

You can purchase an annuity individually or jointly with a partner using savings. Joint annuities allow income splitting for tax purposes, which may benefit couples where one has a lower tax rate. If you buy an annuity with super, it must be in your name only.

How do annuity payments work?

With a conventional annuity, you lock in your payment amount when you buy. Payments can be fixed or rise each year, either by a set percentage or with inflation. Investment-linked annuities vary depending on investment performance—you can choose how your funds are invested. You decide payment frequency (monthly, quarterly, half-yearly, or yearly), but terms can rarely be changed after purchase.

If you buy an annuity with super, you must receive a minimum percentage of the balance based on your age. Check the Australian Taxation Office website for more details.

What happens to annuities when you die?

You can nominate a reversionary beneficiary (usually your partner or dependent) who’ll receive income payments for their life, often at a reduced rate. Alternatively, you can choose a guaranteed period so if you pass away early, your beneficiary receives payments as a lump sum or income stream for the rest of the guarantee period.

How do annuities affect the Age Pension?

Annuities count towards the income and assets tests for Age Pension eligibility; however, some annuities can have favourable treatment and help maximise your Centrelink entitlements. This is where retirement advice Melbourne can help ensure your strategy is structured correctly and aligned with your goals.

What is the difference between annuities and account-based pensions?

Conventional annuities pay a set amount, unaffected by market ups and downs—making them stable.

Investment-linked annuities fluctuate with investment performance, so your payments might rise or fall.

Account-based pensions are more flexible; you can withdraw extra funds if needed, but your money is exposed to market risks, which means market performance impacts the rise or fall of your portfolio’s value. The level of risk you take can be tailored to your tolerance level.

What are the pros and cons of annuities?

Pros:

• Guaranteed regular income, no matter how markets perform.
• Great for those who prefer less investment risk.
• Tax-free from age 60 if bought with super. 
• Indexed options help keep up with cost-of-living increases.
• Lifetime payments if you choose a lifetime annuity.
• Your spouse or dependent may continue to receive income after you pass away (if you nominate a beneficiary).
• Estate benefits if you die during a guarantee period.
• Potentially more favourable Age Pension treatment.

Cons:

• You can’t choose how your funds are invested (for conventional annuities).
• Returns may be lower than some investments, especially if bought during low interest rates.
• Terms and payment frequency can’t be changed after payments start.
• Lump sum withdrawals aren’t available (or can attract hefty penalties).
• Payments may not always keep pace with inflation.

How should you assess your annuity options?

You don’t have to choose just one retirement income stream. Retirement planning Melbourne often involves combining multiple income streams to improve stability and long-term confidence. Many retirees benefit from using a mix—such as annuities, account-based pensions, and lump sums and/or income generated from personal investments. A retirement planner Melbourne can help structure these options effectively, while broader retirement planning advice Melbourne can ensure your strategy stays aligned with long-term goals.

The information provided is general in nature and it remains integral to consider your own circumstances, and talk to a financial adviser if required, before making any decisions.

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