A ‘lifetime’ income stream (LIS) is one of the simplest retirement products to understand at a high level. In exchange for a lump sum, it pays you a regular income for the rest of your life, no matter how long you live. In effect, it converts part of your retirement savings to an income stream that you can never outlive.
The primary purpose of a LIS is to eliminate the risk of running out of superannuation income in retirement.
Most LISs also pay out a lump sum if you die earlier than expected. This helps protect your capital if you only receive the income for a short period of time.
Investment-linked lifetime income streams are a type of LIS that are becoming an increasingly important part of Australia’s retirement landscape, with a growing number of providers launching innovative designs.
The Organisation for Economic Co-operation and Development (OECD) recommends all defined contribution retirement systems should offer lifetime products as a default for the retirement phase.
“Lifetime income can be provided by annuities with guaranteed payments or by non-guaranteed arrangements where longevity risk is pooled among participants. The choice of the type of arrangement will depend on the desired balance between the cost of guarantees and the stability of retirement income. Flexibility could be provided by allowing for partial, deferred or delayed lifetime income combined with programmed withdrawals. Full lump sums should be discouraged in general, except for low account balances or extreme circumstances.”
With an investment-linked LIS, your income payments continue for life, but the amount paid varies over time based on the performance of your chosen investment option(s). The Australian Government also refers to them as ‘Innovative Retirement Income Streams’ or IRIS.
In simple terms, these products sit somewhere between an account-based pension and a fully guaranteed lifetime annuity. Like the guaranteed annuity, investment-linked LISs provide longevity protection to ensure you never run out of income. Like an account-based pension, they can provide exposure to growth assets, which can be important given retirement typically lasts between two and four decades.
An investment-linked LIS provides an opportunity to benefit from long-term market returns, while having lifetime protection by way of insurance or pooling.
Need to know
In recent decades, account-based pensions have been the most common type of superannuation product for retirement in Australia. As the name suggests, payments are made from a superannuation account in your name. Your retirement ‘income’ comes from making withdrawals from your account balance.
Why are LISs being encouraged?
Modelling by the Australian Government Actuary (AGA) showed that retirement income can be 15–30% higher by combining retirement products, particularly by allocating some money to a LIS.
This is consistent with international research and Australia’s retirement policy framework. The OECD recommendations, the Retirement Incomes Review, the Retirement Incomes Covenant and, more recently, Treasury’s ‘Best Practice Principles for superannuation retirement income solutions’ all recognise the need for LISs to maximise many people’s retirement income.
Behavioural research by retirement income researchers David Blanchett and Michael Finke of The American College of Financial Services provides another explanation for the benefits through a behavioural lens. Their research suggests that converting part of a retiree’s savings into a LIS provides a valuable ‘licence to spend’. They found that “retirees spend far more from lifetime income than other categories of wealth”.
The underlying challenge if you don’t have a LIS is simple: nobody knows how long they are going to live.
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If you invest your super in an account-based pension, you can’t know for certain how much to draw each year without running out.
Withdraw too much and you risk running out of money later in life. Withdraw too little and you unnecessarily sacrifice your living standard in retirement. LIS products solve this dilemma.
Chart 1 shows the actual age at death for Australians aged 65 or more who died in 2023. Each individual retiree simply can’t tell how long their retirement is going to last. It could be one year or it could be over 40 years.
Chart 1: Actual age of death for all Australians who died during 2023 aged 65 or more
A growing body of research indicates that Australian retirees have had a ‘fear to consume’ caused by a ‘fear of running out’. Many retirees respond by withdrawing only the minimum each year, which usually means a relatively large balance gets left unused – so the retiree could have had a higher income.
Why have investment-linked LISs been developed?
In the past, some financial professionals have expressed concern that LISs appear poor value for money. The pricing of a fully guaranteed LIS is not just insuring longevity risk but also providing investment guarantees, often for 30 or more years into the future.
When interest rates were low, these guarantees were expensive to provide.
Investment-linked LISs uncouple the longevity protection from the investment guarantees – allowing retirees to enjoy longevity protection while being able to choose the assets that support their LIS. Retirees with a balanced attitude to risk can remove run-out risk while still maintaining some exposure to growth assets. For these retirees, an investment-linked LIS offers this combination.
With an investment-linked LIS, each year’s income varies based on the performance of the chosen investment option, rather than as a specific dollar amount of income each year.
Note
The following examples are highly simplified to demonstrate some basic concepts with investment-linked LIS-type products. They should not be relied on when making decisions about a specific financial product.
Example 1
George, a 67-year-old male, has a super balance of $500,000. The expected number of years of LIS payments payable to him over his lifetime, based on population averages and allowing for longevity improvement, is 21.3 years (using the ALT2020–22 Australian life tables).
In this highly simplified example, the initial level of payment specified by the investment-linked LIS is set based on the retiree’s life expectancy at the time the LIS was purchased.
Therefore, his initial LIS income might be set to $500,000 divided by 21.3 = $23,474 per year.
The investment-linked LIS provider guarantees the longevity risk (it will ensure his payments continue for life, even if he lives to the end of the life tables) but not the investment performance (the price of income units will vary in line with underlying investment performance).
George chooses the same balanced option that his super was previously invested in. His LIS income will move up and down over time based on the unit price of this option at the time of each payment. If over the first year the unit price increased by 6% net of fees, then George’s retirement income will then be 6% higher, being $24,882 at the start of the second year.
Note that at inception, George’s income of $23,474 was slightly less than the regulatory minimum from an ABP (which is 5% x $500,000 = $25,000). However, the expected increases in his investment-linked LIS income over time are equal to the expected net return of his investment option. For a balanced option, George assumes 6% per year. If his unit price goes up 6% per year for 10 years, then his income would rise to $42,038 per year.
Example 2
George expects that his investments will earn an average of 6% per year net of fees, but he anticipates his actual living standard will only need to keep pace with inflation.
He wonders if it’s possible to modify the LIS so that his expected income increases more in line with Consumer Price Index (CPI) than with total market returns.
George asks the provider: “Would you be willing to increase my starting income if I agree to forgo 3% per year of future returns?”
Investment-linked LISs can be modified to better match expected income payments to George’s needs over the course of retirement. The LIS can pay him a higher starting income that then increases less rapidly, so the present value of future income is the same.
A higher starting income will be paid, but instead of increasing in line with investment returns, his income increases by the return less 3% per year.
The LIS provider converts his $500,000 into an income per year, but instead of just using life expectancy for this calculation, it adjusts the factor to 15.5 (which is actuarially equivalent to Example 1 but incorporating the 3% per year adjustment).
This gives a higher first-year income of $500,000 divided by 15.5 = $32,258 per year.
By agreeing for his retirement income to increase by net returns less 3% per year, George’s starting income is $8,784 per year higher than in Example 1.
If his investment option did earn 6% per year net of fees, then his retirement income will increase by 3% per year (= 6% – the 3%), which is closer to his expectation for living cost increases, and to maintaining his target lifestyle.
Chart 2: Projected income from each example (in today’s dollars) compared with an ABP
Decision factors
An investment-linked LIS can provide George with confidence to spend in retirement: he cannot outlive his income.
However, the income level changes over time based on the returns of the investment option chosen and possibly changed by the annuitant.
Most LISs offer a death benefit, where a lump sum is payable to help protect the customer’s capital in the event of early death.
Many also offer a spouse’s option – so if one spouse passes away, the income continues for the remaining lifetime of the survivor.
By agreeing to modify the LIS, George can achieve a higher income at inception, which then is expected to increase more in line with CPI or another target (as opposed to a lower income that increases with full net returns).
Choosing an investment-linked LIS with a suitable exposure to growth assets can help to deliver an efficient lifetime income and offset the effects of future inflation.
Many investment-linked LISs offer investment choice including a switching process.
This article is an introduction only. Investment-linked LISs, and equivalent lifetime pensions from superannuation funds, are expected to be a growing part of the superannuation landscape. They provide an alternative to traditional lifetime annuities and can add confidence when used in conjunction with account-based pensions, which pass longevity risk to the retiree.
Centrelink means-test incentives were put in place in 2019 for these and other LISs. This can provide an instant uplift in age pension income for many retirees who are subject to means testing.
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Let’s assume George is a homeowner with $500,000 in super and no other assets or sources of income. At present, his assets above the relevant Age Pension threshold of $321,500 get multiplied by the 7.8% taper rate and result in a deduction from his Age Pension of $13,923 per year. In effect, his super balance reduces his Age Pension from $31,223 to $17,300 per year.
Fortunately, his super fund offers a lifetime income option. Moving his balance into this option could confidently pay, say, 5.7%* of the investment, or $28,500 per year.
Only 60% of this $28,500 income gets assessed under the income test — which results in an instant Age Pension increase of $8,207 per year to $25,507 per year. The taper rate rules no longer apply, as it’s now the income test that applies to his Age Pension calculation.
The gain in his Age Pension is in addition to the higher and more secure income he’ll get from super, for life, even if George lives to age 100 or more. Detailed modelling of the Age Pension should be undertaken as the rules are complex and the incentive can go the other way at older ages.
* Based on a LIS with a ‘hurdle rate’ of 2.5%. Even higher starting incomes are possible with a higher hurdle. Age Pension rates and bands are as of April 2026.
LISs or investment-linked LISs are an option for older or bereaved members of an SMSF who no longer want to manage their own super assets and would prefer professional investment managers to do that on their behalf, requiring less knowledge and responsibility for investment and longevity risk decisions, and more time to enjoy retirement, with less stress about running out of money.
Note
The LIS rates in this article are simplified illustrations (to introduce basic concepts) using population mortality. The actual rate of income is set by the provider and will be based on the anticipated lifespans of the retirees who purchase that product, the product’s design features and fees.
In Europe, many LISs offer ‘individual underwriting’, which means that each applicant completes a short questionnaire to establish their health status. Those in poorer health may receive an increased annual income. These products are not yet available in Australia.
Jim Hennington and David Orford are from Optimum Pensions.
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David Orford, an actuary, founded Financial Synergy, which became Australia’s leading provider of superannuation administration software. After successfully selling the business to IRESS in 2016, he is now devoting his time to researching and creating innovative retirement solutions, and directing The Orford Foundation.
Jim Hennington is also an actuary and a recognised thought leader on retirement income strategy and modelling.
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