In this guide
It’s a truth universally acknowledged that many retirees worry about running out of savings. Yet most of their retirement savings are in super funds’ account-based pensions which don’t manage the risk of outliving their savings.
“To manage this concern, retirees seek to self-insure by withdrawing the minimum amount possible from their superannuation.” This was the issue highlighted by Treasury’s December 2023 Retirement Phase of Superannuation discussion paper. It found around half of all retirees withdraw at the minimum rate.
It’s not an unjustified fear, especially at a time of highly volatile investment markets.
The TAL and Investment Trends 2023 Retirement Income Report found 33% of pre-retirees expect to outlive their retirement savings.
And there’s the rub. Through no fault of their own, today’s retirees have few options that guarantee them income for life other than the Age Pension, regardless of how long they live. To paraphrase Dickens: a long life, diminishing savings, result misery. A long life, guaranteed income for life, result happiness.
These sentiments have not been lost on the big super funds. From 1 July 2022, funds are obliged to publish their retirement income strategy on their website under the terms of the government’s Retirement Income Covenant. This has removed a roadblock to the development of so-called longevity products designed to provide regular retirement income for life. Progress is slow but some innovative lifetime income products are beginning to hit the market.
What are longevity products?
Longevity products are different to the account-based super pensions commonly offered by super funds.
“Longevity products give people the confidence to draw down income from their super and have a better standard of living now with the confidence that if they do live to quite an advanced age there’s still going to be money coming in,” says Ian Fryer, general manager at super research house Chant West.
Where do longevity products fit in?
It’s generally suggested that longevity products work best alongside an account-based pension and the Age Pension, rather than as a standalone retirement income solution.
While a full or part Age Pension should cover some of the basic costs of daily living, allocating some of your retirement savings to a longevity product or annuity gives the added peace of mind that comes from knowing you will always be able to cover the essentials.
The remainder of your retirement savings can then be allocated to an account-based pension or self-managed investments to pay for discretionary spending. In the early active years of retirement, this might include travel, eating out and more expensive leisure activities.
Who do they suit?
Despite the appeal of a guaranteed income for life, longevity products are not for everyone.
Last year, 60% of retirees had less than $250,000 in super, limiting their retirement income options. People with less than $100,000 in super at retirement are more likely to withdraw it as a lump sum, to repay debts, buy a car or campervan, or carry out home maintenance. At the other end of the income scale, wealthy people already have enough assets to support their retirement lifestyle into a ripe old age.
It’s the middle group of retirees with savings between around $300,000 (where the Age Pension assets test cuts in) and $1.5 million who are most likely to benefit from a lifetime income retirement product. Some retirees who would otherwise be totally self-funded may find a lifetime income product gives them access to a part Age Pension and related benefits, because only 60% of their assets would be assessed under the pension assets test. These aren’t hard and fast cut-offs, but simply a rough guide. Everyone needs to work out their own retirement income needs and how best to meet them.
So what longevity products are currently on offer from superannuation funds? It’s a small but growing field.
What’s on offer from retail funds?
While all big super funds are aware of the need for retirement products that address the need for an income for life, the availability of such products is patchy at best.
According to Treasury, only 3.5% of assets held in super pension accounts are in annuities, compared with 84% in account-based pensions. In fact, the only retirement products offered by most super funds are account-based pensions and transition-to-retirement pensions.
There are two longstanding providers of annuities in Australia: Challenger and AIA (now part of Resolution Life), with Challenger the clear market leader. Investment bond specialist, Generation Life and insurers Allianz and TAL have also entered the market (see below).
Most retail super platforms offer some sort of annuity, generally a rebadged Challenger product and/or one of the other provides mentioned above. CFS FirstChoice, Netwealth, BT Panorama and HUB 24 all offer rebadged annuities.
But innovation is happening. Traditional annuities generally invest in conservative fixed-interest investments with payments indexed to inflation, the Reserve Bank cash rate or fixed for life. But a new breed of products combines income for life with market-linked investments, with the potential to generate higher income when markets rise and less when they fall. While markets can be volatile, in the long run payments should rise.
Some of these newer products include:
- Challenger’s Liquid Lifetime Annuity offers income for life, with payments which can be fixed or linked to changes in inflation, the Reserve Bank cash rate or investment markets. It also offers access to lump sum withdrawals and binding death benefit payments to beneficiaries.
- AMP’s MyNorth Lifetime Income account (developed internally by AMP) can be attached to any of AMP’s hundreds of investment options. It offers investment choice and a market-linked income stream topped up with an annual bonus that rises each year, so your money never runs out. There is also a MyNorth Lifetime Super account you can open before you retire that will treat more of your lifetime products as exempt from the Age Pension assets test. This potentially gives people access to more Age Pension and the confidence to draw down more of their account-based pension in retirement.
- Generation Life’s first annuity-style product, LifeIncome in partnership with Optimum Pensions. As the name suggests, LifeIncome offers income for life combined with the flexibility to select and switch between market-linked investment options. At present it is a standalone product but there are plans to partner with super funds to make the product available to their members directly or as a white label option tailored to their membership’s needs.
- Allianz Guaranteed Income for Life (AGILE) offers market-linked returns with downside protection, a known lifetime income rate with guaranteed increases every year you wait to start your income. Withdrawals are permitted and death benefits can be paid to your spouse.
As these are complex products, they are generally available through an adviser only. Fryer believes this is a smart move as most people will need help to work out if the product is for them, how much to invest and how it might fit in with their overall retirement income plan.
What’s on offer from industry funds?
As of October 2024, seven industry funds also offer income for life retirement products:
- Active Super
- Australian Retirement Trust (ART)
- CARE Super
- Commonwealth Super Corporation (CSC)
- Legalsuper
- Telstra Super
- UniSuper.
Most offer a lifetime income product in partnership with Challenger, although two self-insure (ART and UniSuper).
For example:
UniSuper’s Lifetime Income provides guaranteed income for life, adjusted for inflation. Payments are not affected by market movements and you can choose to have your partner receive your payments when you die. A residual lump sum is payable to your estate if you (and your partner if applicable) pass away within a guaranteed period.
TelstraSuper’s Retire Access Lifetime Pension (in partnership with Challenger). Among other features, it offers a withdrawal option if you need to access your capital; flexible payment options indexed to inflation, linked to the Reserve Bank cash rate or a range of market indices; and the option of directing your pension to your spouse when you die.
Also, Australia’s biggest super fund, AustralianSuper announced it has partnered with life insurer TAL to develop an income for life retirement product with an expected launch date in early 2025. (TAL also provides the lifetime guarantee for AMP’s MyNorth products.)
However, it was the launch of QSuper’s Lifetime Pension in March 2021 that set the pace for longevity products in the industry fund sector. (QSuper merged with SunSuper in 2022 to form Australian Retirement Trust, but the QSuper name has been retained on its Lifetime Pension.) It was the first to combine income for life with an allocation to growth assets to allow the income payments to grow over time. Unlike most funds which team up with an insurance company to provide the lifetime guarantee, QSuper insures internally using a pool arrangement with ART.
QSuper Lifetime Pension has been a regular winner of the ChantWest and SuperRatings annual pension fund of the year and longevity product of the year awards, along with UniSuper and TelstraSuper in recent years.
Worked example
Walter is aged 67, single, owns his home and plans to retire next year. He has $550,000 in super and $100,000 in other assets, such as his car and household contents. He has no other sources of income.
As he has total assets of $650,000, he would ordinarily not receive any Age Pension. However, Walter decides to purchase a QSuper Lifetime Pension for $250,000 and open a traditional account-based pension with the remaining $300,000.
As the Lifetime Pension purchase amount is assessed for the Age Pension assets test at 60% of the purchase price, this will result in a lower assessable asset value. Walter will not only receive fortnightly payments for the rest of his life, he is now also eligible for the Age Pension and the much-prized Commonwealth Pensioner Concession Card.
Walter’s total income before and after the purchase of a QSuper Lifetime Pension
| Current plan | New plan | |
|---|---|---|
| Initial funds | ||
| Account-based pension balance | $550,000 | $300,000 |
| Lifetime Pension purchase price | Nil | $250,000 |
| Total | $550,000 | $550,000 |
| Income sources | ||
| Account-based pension | $27,500 | $15,000* |
| Lifetime Pension | Nil | $17,508** |
| Age Pension | Nil | $6,604*** |
| Total yearly income | $27,500 | $39,112 |
Source: QSuper
- *Income based on withdrawal rate of 5%
- **Payments based on 2023–24 financial year, single option
- ***Age Pension income estate based on income and assets tests as at 20 March 2023.
As a result of the reduction in assessable assets, Walter’s Age Pension entitlement has increased from nil to $6,604, and his total annual income has increased by $11,612.
For an estimate of how much retirement income you could earn with a longevity product, or a combination of an account-based pension and a longevity product, try out the QSuper calculator, TelstraSuper’s Lifetime income calculator and/or the Challenger Retire with Confidence Tool. As the design of the products differs, the annual retirement income for the same initial outlay will also be different.
The outlook for longevity products
Ian Fryer says he would be surprised if AustralianSuper was the only fund to launch a lifetime income product in 2025 and expects more by the end of 2026.
It has long been recognised that super funds need to pay more attention to the retirement phase of super after decades of focus on the accumulation phase. And there is unquestionably pent-up demand from retirees for pension products that offer the certainty of knowing that their money won’t run out.
That’s the carrot. Until recently there’s been no regulatory stick but that changed with the introduction of the Retirement Income Covenant. First proposed in 2018 and finally coming into force in July 2022, it requires trustees to consider the needs and preferences of members and ensure retirees have greater choice in how they withdraw their super benefits in retirement.
However, that doesn’t necessarily mean all super funds will launch their own lifetime income product. Fryer says funds are likely to take one of two approaches:
- Bring in an existing product from an external provider such as Challenger or Allianz which manages the investments, or
- Do something themselves where they continue to manage the money with some sort of longevity overlay.
Fryer says small- to medium-size funds are likely to do the former due to the cost of developing a bespoke product. There is also a question mark over how many members a lifetime product would work for.
Larger funds with significant numbers of members in retirement phase will find it easier to justify the cost of developing their own product tailored to their members’ needs.
The need for advice
Another hurdle for super funds and their members is the complexity of longevity products and how they interact with account-based pensions and the Age Pension. People may also have questions around how much income to draw from an account-based pension, and what proportion of their savings to invest in a longevity product.
Fryer says most members will probably need some advice. Hopefully, the implementation of the government’s Quality of Advice Review will make it easier for funds to provide timely, affordable advice to members.
With your life savings at stake and the security that comes from knowing you have guaranteed income for life, we recommend you seek independent financial advice and check with your super fund to see what advice they offer.
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