Lifetime Retirement Income: How Super That Pays You for Life Works

The hardest number in retirement planning is the one nobody knows: how long you will live. Spend too fast and your savings run out in your eighties. Spend too cautiously and you go without, only to leave most of it behind. A lifetime income stream is a type of super retirement account built to take that guess off the table — it pays you an income for as long as you live, however long that turns out to be.

This is a plain-English guide to how these products work, how they differ from the account-based pension most retirees use today, and the Age Pension rules that make them unusual. It doesn't cover any particular product. For the basics, start with our guides to superannuation and retirement and to the Age Pension assets and income tests.

The problem it is built to solve

Most Australians turn their super into an account-based pension. Your balance stays invested, you draw an income from it (at least the legislated minimum each year), and whatever is left when you die goes to your beneficiaries. It is flexible — you can change your income or take a lump sum whenever you like — but the risk of running out sits entirely with you. If markets fall early in your retirement, or you simply live to 97, the balance can reach zero while you still need an income.

That risk has a name: longevity risk. Since 1 July 2022, the law has required super fund trustees to have a retirement income strategy that helps members balance three goals: getting the most income, managing risks such as outliving their savings, and keeping flexible access to their money. Lifetime income products are one of the main tools funds have used in response, which is why more of them now offer one.

How a lifetime income stream works

The details differ from product to product, but the basic mechanics look like this:

You set aside part of your super. Once you meet a condition of release (retiring, or reaching 65), you use some of your balance to start the lifetime income stream. Most people use only part of their super and keep the rest in an account-based pension.
Your money joins a pool. Your purchase amount is pooled with other members' money and invested, often in a diversified, balanced-style mix of shares, property and fixed interest.
You're paid an income for life. Your starting income depends mainly on your age and the amount you put in, and on whether you choose income for yourself only or for you and a partner.
Longevity is shared across the pool. When members die, the money left in the pool (beyond any death benefit paid) stays in the pool and helps fund income for those who live longer. That pooling is how the product can keep paying an income that your own balance alone might not sustain.

There are two broad designs. In an investment-linked (or market-linked) lifetime income stream, the payments are set for a year at a time and adjusted once a year, commonly each July, based on how the pool's investments performed against a benchmark return. Income can go up or down between years, but the payments themselves never stop. In a guaranteed lifetime annuity, typically offered by a life insurer, the payment amount is fixed when you buy it, and can be set to rise by a fixed percentage or with inflation. Moneysmart's short summary is that with an investment-linked product the length of your income is guaranteed, but the amount is not.

	Account-based pension	Pooled lifetime income stream	Guaranteed lifetime annuity
How long income lasts	Until the balance runs out	For life	For life
Income amount	You choose, above the legislated minimum	Set yearly, moves with the pool's returns	Fixed at purchase, or indexed
Who carries investment risk	You	Shared across the pool, reflected in your payments	The provider
Access to your money	Any time	Limited, and it reduces over time	Limited, and it reduces over time
When you die	Remaining balance goes to your beneficiaries	Limited death benefit, or payments continue to a partner if chosen	Depends on the options chosen, such as a reversionary partner or a guarantee period
Age Pension assets test	Full balance counts	60% of purchase price, then 30%	60% of purchase price, then 30%
Age Pension income test	Deemed income on the balance	60% of the payments	60% of the payments

The Age Pension rows apply to lifetime income streams bought on or after 1 July 2019 that meet the capital access rules. Individual products can differ on every other row.

A lifetime income stream swaps access for certainty. You give up some control over a lump sum. In return you get an income that can't run out, however long you live, because the risk of living a long time is shared across the pool rather than carried by you alone.

The Age Pension angle

This is what makes these products unusual. For lifetime income streams bought on or after 1 July 2019, Services Australia does not count the full amount you put in. Under the assets test, it counts 60% of the purchase price, falling to 30% from your 84th birthday (or after at least five years, if you start later). Under the income test, once payments begin it counts 60% of the gross payments you receive. Compare that with an account-based pension, where the whole balance counts under the assets test and deemed income is assessed under the income test.

There is a condition attached. The 60% and 30% rates apply to products that comply with the capital access schedule in super law. A product with a larger surrender value or death benefit than the schedule allows can be assessed at more than 60% and 30%.

Applies to lifetime income streams bought on or after 1 July 2019 that comply with the capital access rules. The lower rate starts at age 84, or after at least five years if you start later. Products with higher refund or death benefits can be counted at more.

Worked example. Joan is 67, single, owns her home, and has $600,000 in super. To keep the example simple, her super is her only assessable asset. With all $600,000 in an account-based pension, she is $267,000 over the $333,000 full-pension threshold for a single homeowner. The pension reduces by $3 a fortnight for every $1,000 over, so it falls by 267 × $3 = $801. Her assets-tested pension is $1,200.90 − $801 = $399.90 a fortnight.

Now suppose Joan moves $200,000 into a lifetime income stream and keeps $400,000 in her account-based pension. Only 60% of the $200,000 counts, so her assessed assets are $400,000 + $120,000 = $520,000. That is $187,000 over the threshold, a reduction of 187 × $3 = $561, and her assets-tested pension becomes $1,200.90 − $561 = $639.90 a fortnight. That is $240 a fortnight, about $6,240 a year, more Age Pension, on top of the lifetime income payments themselves.

In both cases it's the assets test, not the income test, that sets Joan's pension. Say her lifetime income stream starts at $12,000 a year (an assumed figure for illustration, not a quote). Her deemed income on $400,000 is $66,800 × 1.25% + $333,200 × 3.25% = $835 + $10,829 = $11,664 a year, or $448.62 a fortnight. Add 60% of $461.54 a fortnight in payments ($276.92) and her assessable income is $725.54. That's $499.54 over the $226 free area, reducing her pension by half of that, $249.77, to $951.13. That's higher than $639.90, so the assets test applies. From her 84th birthday, the lifetime part will count at $60,000 instead of $120,000. If the assets test still applies to her then, that is worth up to a further 60 × $3 = $180 a fortnight.

Joan's Age Pension per fortnight under the assets test, the test that applies to her in both cases. Single homeowner rates and thresholds as used in our Age Pension guide. Excludes her other assets and the lifetime income payments themselves.

This works in Joan's favour because she sits on the assets-test taper. Someone who already receives the full pension, or whose assets are well above the cut-off, may see little or no change. The effect is personal, so it is worth modelling rather than assuming.

Access and death benefits: the trade-off

The rules that give lifetime income streams their Age Pension treatment also limit how much money you can take back out. Under the capital access schedule, the most you can withdraw declines over time, broadly in a straight line over your life expectancy from the day the income stream starts. Once you pass that point, there may be nothing left to withdraw. Some products, for example, refund your purchase amount less the payments you have already received, up to the legislated maximum and sometimes after a market adjustment.

Death benefits follow similar limits. Depending on the product and the options you choose, your income may continue to a surviving partner for life, or a lump sum may be paid to your beneficiaries — but typically a smaller one the longer you've been receiving payments. That is the price of pooling: money that would have gone to your estate helps fund the income of members who live longer. If leaving a large inheritance matters to you, it is one reason to use only part of your super this way.

Tax and the transfer balance cap

A lifetime income stream that meets the rules is a superannuation income stream like any other retirement-phase pension. Earnings on the assets supporting it are tax-free in the retirement phase, and payments are treated as super benefits, which for most people aged 60 and over are tax-free. The amount you use to start one also counts towards your transfer balance cap, the lifetime limit on how much super you can move into the tax-free retirement phase.

Questions to ask before you commit

How is my starting income worked out? Ask for a projection at your age and for the amount you're considering, for yourself only and with a partner.
How do payments change each year? Find out whether the income is fixed, indexed or investment-linked, what benchmark is used, and what happened to payments in weak years.
What does it cost? Fees are often built into the income rather than shown as a separate deduction, so ask how they are charged.
What if I change my mind? Check the cooling-off period and how the withdrawal value falls over time.
What happens when I die? Understand the death benefit, the partner option, and how both change the longer you hold it.
How much, if any? These products are usually used alongside an account-based pension, not instead of one. The split depends on your other income, your health, your Age Pension position and how much flexibility you want to keep.

Where advice fits

A lifetime income stream is hard to undo, and whether it makes sense depends on things only you can weigh: your health and family history, whether you have a partner, what else you own, and how you feel about trading access for certainty. The Age Pension effect can be significant for some people and close to nothing for others. A licensed financial adviser can model your actual balance, compare the income from different designs, and work out how much, if anything, to put into one. For the underlying rules, see our guides to superannuation and retirement and how the Age Pension assets and income tests work.

Sources

Disclaimer: This article is general information only and does not take into account your objectives, financial situation or needs. It is not financial product advice, and it does not describe, compare or recommend any particular product or provider. Product features, fees, income rates and withdrawal and death benefit terms vary, so read the product disclosure statement. Age Pension rates, thresholds and deeming rates change regularly, and the worked example uses simplified, hypothetical figures — check current figures with Services Australia and the ATO. AdviceGenie is built by Cognify Labs Pty Ltd and does not hold an AFSL. Before acting on anything here, consider its appropriateness for you and speak with a licensed financial adviser.