Retirement Income Streams

Types of retirement income products

  • Pension or annuity? What’s the difference?
  • Account based pensions and annuities (also known as allocated pensions)
  • Lifetime pensions and annuities
  • Life expectancy pensions and annuities
  • Fixed term pensions and annuities
  • Term allocated pensions and annuities (also known as Market-linked pensions and annuities)

Pension or annuity? What’s the difference?

  • Pensions are only available from superannuation funds and can only be purchased with superannuation money (that is, money paid out from a superannuation fund or retirement savings account)
  • Annuities can be purchased from life insurance companies using superannuation money or, in some cases, other savings.

1. Account based pensions and annuities

An account based pension or annuity (also called an allocated pension) is one of a number of products that you can buy with a lump sum from a superannuation fund, or paid from a self-managed superannuation fund, to give you an income during your retirement.

Setting up an account based pension or annuity

  • Account based pensions can be purchased from superannuation funds using superannuation money (that is money paid out from a superannuation fund or retirement savings account (RSAs). Account based annuities can be purchased from a life insurance company using superannuation money.
  • An investment account is set up with this money from which you draw a regular income. A minimum payment must be made at least annually.
  • There is no maximum limit set on the income that can be drawn each year giving you greater flexibility in determining your income requirements.
  • The capital value of the pension or annuity, and the income from it, cannot be used for borrowing.
  • You may choose how your money is invested by the fund manager (known as ‘investment choice’). Fund managers have different investment strategies, which you can select, that carry different levels of risk and, therefore, potentially different levels of return.

Income

  • Income is payable until there is no money left in the account. If you die before this happens, the account balance will be paid out as a lump sum to your dependant, to your estate, or the income payments can continue to be paid to a beneficiary, such as a spouse or dependant. You can choose a reversionary beneficiary for the income stream, such as a dependant or spouse.
  • Account based pensions and annuities give you the flexibility of having access to your money at any time. You can withdraw some or all of the money above the minimum amount as a lump sum (this is known as full or partial commutation).
  • The level and duration of income payments is not guaranteed. This is because the account balance is affected by withdrawals, fees and investment returns.

Tax

  • For age 60 and over: All pension payments from a taxed source (where the super has been taxed in the fund) are tax free when paid to individuals aged 60 or over.
  • For under 60: Pension payments for individuals aged under 60 are taxed.

Social security (age pension)

  • Your eligibility for the age pension is worked out by taking into account both how much income you get (the income test) and how much your assets are worth (the assets test). The test that results in the lower rate of age pension is the one that is applied.
  • For the purposes of the income test for the age pension, income from an account based (also known as an allocated pension) or annuity will be reduced by an amount that represents the return of your capital. This has not changed.
  • An account based income stream is assessed under the assets test for the age pension.
  • The pension assets test taper is $1.50 per fortnight for every $1,000 above the relevant threshold.

2. Lifetime pensions and annuities

A lifetime pension or annuity is one of a number of products that you can buy with a lump sum from a superannuation fund or other money to give you an income during your retirement.

 

If you already have a lifetime pension or annuity you will not be able to transfer to a new account-based pension or annuity.

Setting up a lifetime pension or annuity

  • Lifetime pensions can be purchased from a superannuation fund using superannuation money (that is money paid out from a superannuation fund or a retirement savings account (RSA). Lifetime annuities can be purchased from a life insurance company using either superannuation money or other savings.
  • Joint lifetime annuities, where income payments are made to two or more beneficiaries, can only be purchased with other savings (that is non-superannuation money).
  • Lifetime pensions or annuities provide income payments for your lifetime and for the lifetime of reversionary beneficiaries (if any).
  • Investment choice (which is where you choose how your money is invested by the fund manager) is not relevant because the income is fixed subject to indexation.

Income

  • Income is fixed at commencement and can be indexed to increase each year, either by a fixed percentage or in line with inflation.
  • Generally, the money in the income stream cannot be taken out (also known as non-commutable).
  • The income stream can be set up on a reversionary basis so that income payments continue to be paid to a beneficiary, such as a spouse or dependant, when you die. Your beneficiary will not usually receive the same level of income payments that you received (that is the payments are usually reduced).
  • The option of a guaranteed period is also available. If you die within the specified guaranteed period, your nominated beneficiary (or your estate) will be entitled to receive either the remaining income payments as an income stream or lump sum. Unlike the reversionary beneficiary option, the income payments received under a guaranteed period will not reduce.

Tax

  • For age 60 and over: All pension payments from a taxed source (where the super is taxed in the fund) are tax free when paid to individuals aged 60 or over.
  • For under 60: Pension payments for individuals aged under 60 are taxed.

Social security (age pension)

  • Your eligibility for the age pension is worked out by taking into account both how much income you get (the income test) and how much your assets are worth (the assets test). The test that results in the lower rate of age pension is the one that is applied.
  • For the purposes of the income test for the age pension, income from a lifetime pension or annuity will be reduced by an amount that represents the return of your capital. The income test will not change under the new rules from 1 July 2007.
  • Lifetime income streams can be complying income streams if they have certain features in the Social Security Act 1991. Complying lifetime income streams bought on or after 20 September 2004 will be 50% exempt from the assets test for the age pension. Complying income streams bought before 20 September 2004 are 100% exempt from the assets test for the age pension. However, this exemption will be removed for income streams purchased on or after 20 September 2007, but will not affect the assets test treatment of income streams purchased before this date.

3. Life expectancy pensions and annuities

A life expectancy pension or annuity is one of a number of products that you can buy with a lump sum from a superannuation fund or other money to give you an income during your retirement.

 

If you already have a life expectancy pension or annuity you will not be able to transfer to a new account-based pension or annuity.

Setting up a life expectancy pension or annuity

  • Life expectancy pensions can be purchased from a superannuation fund using superannuation money (that is money paid out from a superannuation fund, or a retirement savings account (RSA). Life expectancy annuities can be purchased from a life insurance company using either superannuation money or other savings.
  • Joint life expectancy annuities, when income payments are made to two or more beneficiaries, can only be purchased with other savings (that is non-superannuation money).
  • Life expectancy pensions and annuities provide income payments fixed for a term that is based on your life expectancy as if you were 5 years younger.
  • Investment choice (which is when you choose how your money is invested by the fund manager) is not relevant because the income is fixed subject to indexation.

Income

  • Income is fixed at commencement and can be indexed to increase each year, either by a fixed percentage or in line with inflation.
  • You can choose to have part of your initial investment repaid to you at the end of the term. This is called the residual capital value.
  • Income is payable for a term which lies between your life expectancy at purchase or your life expectancy as if you were 5 years younger.
  • You can choose a reversionary beneficiary for the income stream. If the reversionary beneficiary is your partner (that is your spouse or de facto), and their life expectancy is longer than yours, then you can choose to have your income paid for a term between their life expectancy at purchase, or their life expectancy as if they were 5 years younger.
  • If you purchased a life expectancy pension or annuity before 20 September 2004, then different rules apply. Under the old rules, income is payable for a term equal to your life expectancy at purchase, or for a term of 15 years if your life expectancy was more than 15 years. These rules no longer apply.

Tax

  • For age 60 and over: All pension payments from a taxed source are tax free when paid to individuals aged 60 or over.
  • For under 60: Pension payments for individuals aged under 60 are taxed.

Social security (age pension)

  • Your eligibility for the age pension is worked out by taking into account both how much income you get (the income test) and how much your assets are worth (the assets test). The test that results in the lower rate of age pension is the one that is applied.
  • For the purposes of the income test for the age pension, income from life expectancy pension or annuity will be reduced by an amount that represents the return of your capital. The income test will not change under the new rules from 1 July 2007.
  • Life expectancy income streams can be complying income streams if they have certain features. A life expectancy income stream bought on or after 20 September 2004 will be 50% exempt from the assets test for the age pension. However, this exemption will be removed for income streams purchased on or after 20 September 2007 but will not affect the assets test treatment of income streams purchased before this date.

4. Fixed term pensions and annuities

A fixed term pension or annuity is one of a number of products that you can buy with a lump sum from a superannuation fund or money from other sources to give you an income during your retirement.

 

If you already have a fixed term pension or annuity you will not be able to transfer to a new account-based pension or annuity.

Setting up a fixed term pension or annuity

  • Fixed term pensions can be purchased from a superannuation fund using superannuation money (that is money paid out from a superannuation fund or a retirement savings account (RSA). Fixed term annuities can be purchased from a life insurance company using either superannuation money or other savings.
  • Joint term annuities, where income payments are made to two or more beneficiaries can only be purchased with other savings (that is non-superannuation money).
  • Fixed term pensions and annuities provide income payments for a fixed term (usually between 1 and 25 years).
  • Investment choice (which is when you choose how your money is invested by the fund manager) is not relevant because the income is fixed subject to indexation.

Income

  • Income is fixed at commencement and can be indexed to increase each year, either by a fixed percentage or in line with inflation.
  • You can choose to have part of your initial investment repaid to you at the end of the term. This is called the residual capital value.
  • The income stream can be set up on a reversionary basis, so that income payments continue to be paid to a beneficiary, such as a spouse or dependant, when you die.

Tax

  • For age 60 and over: All pension payments from a taxed source are tax free when paid to individuals aged 60 or over.
  • For under 60: Pension payments for individuals aged under 60 are taxed.

Social security (age pension)

  • Your eligibility for the age pension is worked out by taking into account both how much income you get (the income test) and how much your assets are worth (the assets test). The test that results in the lower rate of age pension is the one that is applied.
  • For the purposes of the income test for the age pension, the amount of income assessed will depend on a number of factors including your life expectancy and the term of the product (in most cases, must be greater than 5 years to qualify).
  • A fixed term income stream is not a complying income stream and as a result is fully assessed under the assets test for the age pension.