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Are lifetime income streams the answer or just the easy way out?

Will lifetime income streams solve the challenges of meeting the Retirement Income Covenant? Or does this ‘solution’ raise more questions than it answers?

There’s a reason why I find lifetime income streams difficult to understand and write about. And that’s because they are. Yet this third level or ‘bucket’ of retirement income seems to be the preferred ‘next wave’ of retirement funding, as evidenced by the strong support of the Australian Government.

But can these products really be the answer, when so many questions about them remain?

I approached this article with a rather contradictory attitude.

Firstly, a hunch that the emphasis on lifetime income streams as a way to solve many retirement income issues for ordinary Australians was misplaced. And secondly, a determination to ignore this hunch and to try to explore these products with as open a mind as possible; to better understand if they do indeed meet the ‘fear of running out’ and will therefore become a valuable part of the retirement income system.

The Government push

Lifetime income streams have been in the news a lot lately. These ‘longevity protection products’ are described as a ‘central component of … retirement income strategy’ in the not-so-secret Treasury draft paper on ‘best practice for superannuation retirement income solutions’. They are also part of a ‘big push’ by the Grattan Institute for government guaranteed products in its recent Simpler super: taking the stress out of retirement report.

The subtext here is that the greatest fear of retirees is running out of money and so they won’t spend what they could. Or, by refusing to spend enough and leaving overly large bequests, retirees are deliberately ‘gaming the system’. Ergo, guaranteed income through a product that is largely spent down while they are alive must be the solution.

But this emphasis on lifetime income streams as a fundamental part of retirement income is erroneous. It pushes retirees straight to step five of a logical retirement income journey, without first securing steps one to four - those most relevant for about 70% of Australians. These steps are:

  1. understanding super
  2. understanding how super combines with an Age Pension,
  3. understanding work options after 60 and how work income can affect both super and Age Pension entitlements, and
  4. knowing how the family home can also be accessed as a source of funding.

Each one of these four steps is interrelated, so there is a lot to understand here. In reality, they represent Retirement Basics #101. And that’s before contemplating the later life need to contribute to aged care, whether at home or in a residence.

So how can any single specific income stream really be ‘the answer’ to all the various challenges throughout a long retirement journey?

Further questions about lifetime income streams were usefully identified by Professor Ron Bird in an article published in Firstlinks on 12 February. One of his main concerns is that there is a distortion of forced accumulation and spending, asking why Australians should be forced to spend to a certain level if they ‘just don’t want to’? Professor Bird’s conclusion is that "our current system is able to adequately fund retirement, but it is not working to the lifetime benefit of all."

Running the numbers

As part of my preparation for this article, I approached two product suppliers and asked them to run some numbers for me on a fictitious couple, Barbara and John, aged 70 and 78, who had about the median amount of super ($400,000) and received a full Age Pension. The plan was to test how an investment of half the amount in their Account-Based Pension (i.e. $200,000) would work in an annuity or lifetime income stream.

It didn’t work that well. To be fair, it was probably not a useful example as the assets of this couple were too low. I had hoped for an apples with apples comparison, but the two different companies were offering different solutions, with different features, so I am none the wiser. I’m grateful to Patrick Clarke from Genlife and Aaron Minney from Challenger for running calculations and explaining the many different benefits and variations. And both sets of calculations showed a reliable annual income of between $11,000 - $14,000 for the couple through to their 90s. Did one product offer a better outcome than the other? Not as far as I could ascertain, it depended on too many different factors. And therein lies the problem.

The one thing I do now clearly understand now is why these product providers insist their products are sold by a financial planner. They are just too complex for most retirees to make sense of by reading a PDS or researching online.

It also occurred to me as I struggled to understand the many details of these income streams that the $200,000, if left in an Account-Based Pension, might just earn more and be less trouble and more accessible while still able to be left to nearest and dearest.

I also asked independent analyst, Harry Chemay, how he thought an everyday retiree might compare lifetime income streams or annuities:

‘The problem is that these products are complex by nature and require a level of explanation that is often hard to convey purely online. It is thus hard for retirees to compare the features and benefits of different products to determine if one might be appropriate for their circumstances.

A further complication is that these products may interact with and impact the Age Pension benefit, and understanding how is vital to any individual or couple considering a lifetime income stream. Because of the complexity involved, people may need to seek financial advice on whether and how lifetime income stream products should be considered in their retirement planning.’

Another problem is whether there is a potential conflict of interest when white label products are positioned as ‘chosen’ by a fund and promoted as a single choice lifetime income stream solution without offering any other similar comparisons?

But not every retiree really wants to manage their own money and that’s a good call to make if they do not feel up to the task of ensuring their own best returns over the long years of retirement. Some individuals are keen to achieve a guaranteed income and lifetime income streams can offer this low-risk income, with the added benefit of favourable Centrelink treatment.

So, where have I landed?

I now know a lot more about lifetime income streams, but not enough to say I understand them well. Sadly, the more I learned, the more questions arose.

I can see why they could be appealing to those wanting the ‘problem’ of managing their retirement income to simply go away. But as per my less than useful example of Barbara and John, you have to have sufficient assets to make the exercise of evaluating them with a financial planner worthwhile.

Regardless, the main problem hasn’t gone away. Retirement funding is still a compulsory, largely ‘hands-off’ system where someone else will manage your funds for you for the 40 or so years of accumulation. And then, with little in the way of warning, support or preparation, you’re tossed out on your own to manage and navigate the five separate pillars of retirement income during 30+ years of decumulation. And, worse still, to understand how these pillars can combine in the most tax-effective, risk-controlled way.

I still believe that the most urgent need right now is a three-step educational program which offers:

  • prompts at trigger ages and stages, commencing at age 50
  • training in how super and the Age Pension combine, before preservation age, delivered by workplaces and local councils
  • reminders of your broad options as you age, including what to read, who to see, who can help?

Only when we have successfully supported a majority of Australia’s retirement cohort to fully understand the way their super, savings, work and home might combine with an Age Pension, will today’s retirees have the basis for understanding the many features of lifetime income streams as an add-on layer to their Account-Based Pension.

Which means, there’s a long, long way to go.

 

Kaye Fallick is Founder of STAYINGconnected website and SuperConnected enews. She has been a commentator on retirement income and ageing demographics since 1999. This article is general information and does not consider the circumstances of any person.

 

15 Comments
David Williams
March 29, 2025

Thanks, Kaye for an excellent analysis and to Harry for his contribution.
I suggest the first step in Retirement 101 is ‘understand your own potential longevity, its reasons and what you can do to make the best of it (the same for your partner) using online personal longevity planning’.
This should also be the first and extra step in your educational program. Until that comes along, accessible online longevity planning should be provided by super funds and advisers to clients from age 45. together with regular ongoing support for adapting to changes. It can make a huge difference to how people respond to advice on complex investment products and strategies they don’t understand. It also enriches their longevity - the rest of their life.

Disgruntled
March 29, 2025

It's the thin edge of the wedge being pushed in a bit further.

The start was:

the objective of super is 'to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way'.

The ultimate aim is to limit Lump Sum withdrawals and make us take Super as an income stream.

1. Stops people withdrawing large amounts/all of Super to pay down mortgage or help kids get into their own property, large spending spree on new cars, holidays etc then going on the full pension.
IE Take advantage of the gap between preservation age and pension age to whittle down Super to ensure full pension. Bring higher balance down to limit in first 2 years to meet the 5 year rule.

2. Helps the Funds themselves with cash flow as more and more people with higher balances are now reaching preservation age. Funds have a lot of money tied up in infrastructure, bonds, equities etc, so large cash withdrawals in quantity may lead to liquidity issues Baby Boomers have hit preservation age, as too early GenX. These groups have higher balances on average than the Boomers

3. Preservation Age will be raised as well in the not too distant future

Raising of Preservation Age will occur too, in the not too distant future

David Orford
March 28, 2025

The financial benefit to a retiree of getting the best solution for them is worth maybe 2 years’ salary. This is a “high value” decision BUT with lack of adequate knowledge and little or no experience - hence help is worth paying for - but costly, comprehensive financial plans are not required in many cases. “Advice” needs to be limited to only what’s required - not “comprehensive”.

I’ve bought a lifetime annuity and doing everything I can to outlive the Actuary’s forecast of my longevity. 

Steve
March 28, 2025

I think the principal of annuities is sound, pooled risk being the only sensible way for people to be comfortable drawing down their capital without the fear of running out. BUT the way annuities are managed and marketed is a big drawback. They are deliberately opaque, perhaps to "encourage" people to use financial advisors to navigate them. That smells fishy for starters; when providers and advisers have such chummy relationships its usually bad for the mug with the cheque. Second, as private enterprises they invest in the lowest returning asset classes for "safety". So they don't go broke. As with Rob, I get this but hidden behind a wall is how much of the returns end up with the client and how much is profit. I still think the clients are getting shafted. People are used to seeing how much their investments return and the initial payments offered by the annuity providers might sound OK, but remember some of the payment is actually your own money being given back to you dressed up as "income". I look forward to the possibility that not-for-profit organisations like industry super funds can offer annuities. I would be especially keen to see how much extra the monthly payments can increase in a not-for-profit environment. Some simple number crunching I did a while ago suggested somewhere around 40% higher payments. For no increase in risk, just passing on the full investment returns to the customers. Really need way greater transparency and disclosure before I trust any of these outfits with my money.

John
March 28, 2025

Being retired for almost a decade, with no chronic health issues, I still have my marbles and remain numerate. Hence, no interest in an annuity, as it requires forfeiting capital to fund it. That's a loss of optionality for that capital. Worse, I have yet to find an annuity that pays better than the circa 9% p.a. total return I have seen in retirement via our conservative SMSF. Left leaning Grattan Institute reckons annuities can provide 25% greater pensions than industry super funds if 80% of balances on retirement are forced into (government) annuities, but does not explain the maths, other than to claim that super fund fees are about 15% of drawdowns and in retirement, almost 60% of lifetime fees are incurred.

Craig McKenzie
March 28, 2025

I think it's worth pointing out to readers that this quote in the article is incorrect....."asking why Australians should be forced to spend to a certain level if they ‘just don’t want to". There is no law or legislation that requires anyone to spend anything they don't want to. There is however, a requirement to draw down a minimum amount every year once someone starts an account based pension, but there is no requirement for them to spend it.
A subtle but very important point of difference.

James Gruber
March 28, 2025

Craig,

I think you've misread the quote. It's about Grattan proposals not about current law.

James

Craig McKenzie
March 28, 2025

Hi James, yes i understand the Grattan proposal is for the use of guaranteed lifetime (complying) income streams. I get that these income streams will be RCV0, but it's still misleading to say that Australians will be 'forced to spend to a certain level, even if they don't want to'. Every payment received from a lifetime complying annuity is part income, and part return of capital. People are free to reallocate these funds to other investments if they wish. No-one is proposing forced spending.

Peter
March 27, 2025

"The one thing I do now clearly understand now is why these product providers insist their products are sold by a financial planner."

This certainly wasn't the case when we bought lifetime income products from Challenger about 2.5 years ago. Has this changed? Or are you misrepresenting the provider?

john
March 28, 2025

It is so the provider is at least 'arms length' from the client. In other words there is a more 'favourable' '3rd party', like the advisor in between. The provider can then more easily do do all the usual defer, delay, defend, deny etc as per the book by Jay Feinman. Also refer the Brian Thompson case.

Kaye
March 28, 2025

Hi Peter, thank you for raising this point. I have double checked and I did misunderstand the fact that most people seek financial advice - but it is not insisted. My apologies for getting this wrong, warmest, Kaye

Jeff O
March 27, 2025

An answer….but there are (better) solutions to manage longevity risk and boost retirement incomes and spending for the majority of older Australians - available right now - including the Commonwealth's Home Equity Release Scheme.

For most older Australians (about 80%) today, retire with most of their private savings "locked up" in their owned homes - and do not want to downsize but wish to continue to live and die at home. Currently, most die with most of their wealth and it's remains locked up in their homes to bequested with a cold hand.

Arguably, most older Australians underspend during retirement but leave bigger private bequests, fewer jobs, and more government debt for younger Australians.

A small reverse mortgage provided by the government on their home (at a borrowing cost of only 3.95%pa) - the Pension Loan Scheme rebranded as the Home Equity Release Scheme - can provide a (private) annuity and keep the vast majority of their private savings locked up in their home - a growth asset (say 6-8%pa over the long run).

Indeed, if an older Australian qualifies for an Aged Pension - you can top up the aged pension to a limit of 1.5 times the maximum aged pension - about an additional $12000 pa for a single and almost $21000 pa for a couple from retirement age (say 70). And you do not need to be eligible for the Aged Pension and choose to receive significantly more pa.

PS - a health warning - beware private providers of reverse mortgages/home equity release schemes at much higher borrowing costs (8-9%or more), big loans /capital release, significant fees without independent "disinterested" advice.

Indeed, your education program - provided by employeers and local council - will overcome some of the market and government failures over hanging the well being for older Australians in retirement; but it does not cover the home and the cost of disinterested advice nor the “poor” behaviours of older Australians. Indeed, fundamentally, financial products involve services - and critically, “disinterested” advice that informs the buyer, fulfils their wishes and acts in their best interest.

Rob
March 27, 2025

Turn 180 degrees and look at it from the provider's viewpoint. The provider takes on a long term "liability" to provide Barbara and John an income stream for life or a defined period. To do that, they need to "match" the "Liability" with Capital set aside in Investment "Assets" - invariably conservative, dominated by Bonds as timelines are so long. Any move up the " risk curve" needs more capital set aside. Market turmoil - add more Capital. By and large well Regulated however 20+ years is a long time - while the risk of a provider going under is low, it is not Zero so careful!!

My personal view is that the returns are too low - I understand why they are low but I reckon I can do better with more flexibility!!

Craig McKenzie
March 29, 2025

Hi Rob, assessed purely on the investment returns that annuities provide then i agree they probably don't stack up. Add in the uplift in the age pension, if you fall into that category, from purchasing a complying annuity and it starts to look a lot more attractive. The income return alone from the increased age pension is equivalent to a guaranteed, risk free return of 7.8% p/a.

Harry Chemay
March 27, 2025

Great piece, Kaye, and thanks for including my quote.

As to your question "are they (LIS) really the ‘answer’ to the RIC requirements?" here are my thoughts (as provided in my written response to you:

The July 2022 introduction of the Retirement Income Covenant (RIC) requires all super funds to work to optimise the retirement outcomes of members by considering pension income levels, variability, and flexible access. Funds must also help their retired members manage investment, inflation and longevity risk.

It is the longevity risk aspect of the RIC that lifetime income streams are seeking to explicitly hedge for their members. And so a number of life insurance companies and super funds have responded, releasing a range of modern market-linked annuities and lifetime income stream products to cater to our longer lifespans and the RIC obligations.

Take-up of these products has however been slow, for two primary reasons. First, with the median balance of retiring Australians still being around $200,000 at present, many retiring households do not have a sufficiently large amount of super for a lifetime pension component to make a material difference to their living standards, especially when compared to the Age Pension.

Second, for those households with sufficiently large balances to benefit from some level of lifetime income stream, the inherent complexity of these products means that they are best considered with the help of financial advice. Whereupon advice cost and accessibility issues may become a constraint.

Lifetime income stream solutions (and non-super lifetime annuities) have therefore found their highest take-up rates among advised Australians with higher superannuation account balances.

Broadening lifetime income stream acceptance, understanding and applicability amongst the general population continues to be a work-in-progress.

 

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