Annuity
A product paying guaranteed income for a fixed term or for life, in exchange for a lump sum.
An annuity converts capital into a contracted income stream. Unlike an account-based pension, payments are guaranteed by the provider rather than depending on investment returns.
Lifetime annuities pay until death, transferring longevity risk to the provider. Fixed-term annuities pay for an agreed period, often used to bridge a gap before another income source begins.
The trade-off is flexibility and inheritance. Capital is generally locked away, and depending on the terms little or nothing may remain for your estate.
Provider strength matters because the guarantee is only as good as the institution behind it. Annuity providers are prudentially regulated and must hold capital reserves, which is central to why the guarantee carries weight.
Covering the essentials
A common approach uses an annuity to cover fixed living costs, leaving an account-based pension to fund discretionary spending with market exposure and flexibility.
The bit people get wrong
Annuities receive concessional treatment under the Age Pension assets test in some cases, which can mean a higher pension entitlement alongside the guaranteed income. The interaction is worth modelling.
Common questions
Are annuity payments taxable?
Annuities purchased with super money after age 60 are generally tax-free. Those bought with non-super money have a different treatment based on the capital component.
Can I get my money back?
Some products offer a withdrawal period with a declining surrender value. After that, capital is generally inaccessible.
Do annuities protect against inflation?
Only if you buy an inflation-linked version, which starts at a lower payment. Fixed-payment annuities lose purchasing power over a long retirement.