A relatively new addition to the retirement toolkit in Australia is the market-linked lifetime annuity. They come with some appealing features — guaranteed income for life, potential Age Pension boosts, and exposure to market growth. What’s not to like?
Well, as with most things in finance, there’s no good without the bad. So before getting swept up in the upside potential, we also need to consider the trade-offs.
But first, let’s start with the basics.
What Is a Market-Linked Lifetime Annuity?
A market-linked lifetime annuity (sometimes called an investment-linked or variable annuity) provides income for as long as you live.
Unlike a traditional annuity where payments are fixed by the insurer, income from a market-linked annuity moves with the performance of your chosen investment options — usually within certain limits.
Your payments can rise when markets perform well or fall when they don’t, but they’ll never fall to zero.
How It Works
Here’s the typical flow:
- Invest a lump sum: You contribute a lump sum — inside or outside superannuation — effectively exchanging capital for a lifetime income stream.
- Select your investment option: Choose an investment mix aligned with your risk profile. The more growth exposure you select, the greater the potential fluctuations in income.
- Receive regular income: Your starting payment is based on your age and whether it’s a single-life or reversionary annuity. Each year, your income adjusts according to investment performance.
- Payments continue for life: Regardless of how long you live, payments continue — that’s the insurance component.
Centrelink benefits
One of the main attractions of lifetime annuities (both market-linked and traditional) is the Centrelink treatment.
Unless you have other ongoing income (like a UK pension or employment income), most retirees are assessed under the assets test. With a lifetime annuity, only 60% of the purchase price is counted as an asset until the threshold day (currently age 85), after which only 30% is counted.
For example, investing $500,000 in an annuity would reduce your assessable assets by $200,000, leaving $300,000 counted for Centrelink purposes up to age 85.
However, under the income test, 60% of payments are assessable indefinitely. This is often higher than income assessed under deeming, meaning annuities can be less favourable for those already heavily income-tested.
A bet against an insurer
When you buy an annuity, you’re entering into a contract with a life company (an insurer). Ignoring investment fluctuations, the insurer guarantees to pay you for life. They price that guarantee based on average life expectancy.
If you live longer than expected — you win. If you pass away earlier — the insurer wins (and your estate doesn’t).
That’s why lifetime annuities often make the most sense for healthy retirees who expect to be around for a long time.
Why Choose Market-Linked Over Traditional?
Just because you’ve retired doesn’t mean your investment horizon is short.
If you retire at 60 and live to 90 — that’s 30 years of potential investment growth! A market-linked annuity allows you to participate in that growth through variable income.
Traditional annuities offer more certainty, but the trade-off is lower expected returns. If you’re comfortable with some variability, market-linked can deliver a better balance between income certainty and long-term growth.
Front-loading payments
Many annuity providers offer a feature which allows you to front-load your income. This allows you to get higher income in your early retirement years when you’re most active, and less later on.
For example, choosing a 5% assumed investment return might give you a much higher starting income than an inflation-linked option, but your payments may grow more slowly over time. The provider is essentially bringing some of your future investment returns forward, and in return, they recoup that benefit by limiting income growth down the track.
What happens when you pass away?
When setting up a lifetime annuity, you can choose what happens to your income stream if you pass away:
- Reversionary Beneficiary: Your nominated person (usually your spouse) continues receiving income for the rest of their life.
- Death Benefit: If you pass away within a set Death Benefit Period, a lump sum is paid to your nominated beneficiaries or estate.
Adding a reversionary beneficiary will reduce your initial income — especially if your spouse is younger — because the insurer expects to pay over a longer period.
If death occurs during the Death Benefit Period, the amount paid is based on the current value of your underlying investments. If it occurs after the period ends, no benefit is payable.
Even within the Death Benefit Period, the amount returned to your estate will usually be less than if you’d retained and invested the capital yourself — the trade-off for lifetime income security.
Inside vs Outside Super
You can generally set up a lifetime annuity either inside or outside superannuation.
If purchased with super money, income payments are usually tax-free once you’re over 60.
If purchased with non-super funds, each payment is split between a tax-free return of capital and a taxable growth component. Importantly, the investment earnings within the annuity are tax-free, so there’s no double taxation.
When held outside super, you have greater flexibility with estate planning — you can nominate anyone as a reversionary beneficiary (subject to age rules). For super-based annuities, the reversionary option is generally limited to your spouse or de facto partner.
What happens if the annuity provider goes under?
Annuity providers in Australia are heavily regulated by APRA and must hold significant capital to back lifetime income promises. Your funds are held in a separate, protected pool — so even if the company ran into trouble, your income would continue.
Top Three Benefits of Market-Linked Lifetime Annuities
- Guaranteed income for life: even though payments fluctuate, you’ll always receive some level of income.
- Centrelink advantages: potentially boosts Age Pension entitlements under the assets test.
- Market exposure: access to growth potential and inflation protection through market-linked returns.
Top Three Risks of Market-Linked Lifetime Annuities
- Fluctuating income: Down markets mean lower payments.
- No access to capital: Once invested, the funds are locked into the annuity. Some annuity providers do offer a limited withdrawal window in the early years, however this would likely lead to a higher than otherwise loss of capital.
- Reduced estate value: Your estate may receive less than if you’d retained the capital and invested it independently.
The Guided Investor approach
For retirees receiving a part or nil Age Pension but sitting close to the threshold, a lifetime annuity can be a smart lever to improve cash flow and long-term retirement income.
We like market-linked annuities for their potential to provide lifetime security while keeping exposure to growth assets. You can also adjust investment options along the way to manage income volatility.
We wouldn’t recommend placing all capital in an annuity, but they can be a powerful diversifier within a layered retirement income strategy.
