Account-based pensions are flexible and tax-efficient but finite — the balance can run out. Lifetime annuities transfer longevity risk to an insurer for guaranteed income, with only 60% of the purchase price assessed under the assets test until age 84 (30% after), improving Age Pension entitlement. Term annuities suit specific income gaps. Most retirees benefit from combining an ABP with a lifetime component, though the annuity decision is largely irreversible.
For Australians who have spent years building their superannuation, the question of how to turn that balance into retirement income has more than one answer. The account-based pension — referred to throughout as an ABP — is the dominant product in the Australian market. It is flexible, tax-efficient, and well understood. But it is not the only option, and for some retirees it does not fully address the most significant retirement income risk: outliving your money.
This article gives an overview of the main retirement income structures, the trade-offs each presents, and how to think about the choice.
The ABP's strengths are well-known. Pension payments drawn by a member aged 60 or over are tax-free. Earnings inside the fund on assets supporting the pension are also tax-free, up to the transfer balance cap of $2.0 million for 2025-26 (Colonial First State FirstTech Super Rates and Thresholds 2025-26). The balance can be drawn above the required minimum, including as lump sums. Investment options remain at the member's discretion. Estate planning features — reversionary nominations, binding death benefit nominations — are available. And the ABP is assessed under the standard Age Pension income and assets tests: the full account balance is counted in the assets test, and deeming applies to the balance under the income test (DSS Social Security Guide section 4.4.1.10, guides.dss.gov.au/social-security-guide/4/4/1/10). The weakness is structural: the balance is finite, the investment risk is borne by the member, and drawing an income during a market downturn can accelerate depletion in a way that is difficult to recover from. These are manageable risks for retirees with diversified assets and realistic drawdown rates. For retirees for whom the ABP is their primary income source and who face a long retirement, the longevity question is real.
A lifetime annuity is the alternative designed specifically for longevity risk. You pay a lump sum to an insurer; in exchange, the insurer pays you a guaranteed income for life regardless of how long you live, and regardless of how investment markets perform. The income is predictable. The longevity risk is transferred to the insurer. The trade-off is inflexibility: once purchased, a lifetime annuity generally cannot be surrendered for the lump sum you paid, and the death benefit depends on the features chosen at purchase. For fixed annuities (without CPI linking), inflation erodes the real value of payments over time; CPI-linked annuities have lower starting payments to compensate. The Centrelink treatment of lifetime annuities changed materially from 1 July 2019, when a new framework for "asset-tested income streams (lifetime)" took effect (DSS Social Security Guide section 4.9.3.10, guides.dss.gov.au/social-security-guide/4/9/3/10, Guide version 1.338, 20 March 2026). Under the post-2019 framework, the assessable value for assets test purposes is a specified percentage of the purchase price, not the full amount — reducing assessed assets relative to holding the equivalent sum in an ABP or cash, which can increase a retiree's Age Pension entitlement.
Confirmed lifetime income stream means-test percentages under the post-1 July 2019 framework (DSS Social Security Guide 4.9.3.35, https://guides.dss.gov.au/social-security-guide/4/9/3/35): 60% of purchase price assessable until the day before the recipient's 84th birthday (the "threshold day"); 30% assessable from the 84th birthday onwards for the remaining duration of the income stream. The 40% initial concession aligns with capital-access-schedule compliant products only.
Term annuities — which pay a guaranteed income for a chosen fixed period rather than for life — have a narrower use case. They can be useful for filling a specific income gap: for example, bridging between early retirement and Age Pension age, or providing predictable income during a period of high fixed expenses. They offer no protection against outliving that term. Their Centrelink treatment depends on the term length — shorter terms are treated as short-term financial assets, longer terms as long-term income streams under the standard deeming framework.
Since 2022, a new category of products has emerged from the Retirement Income Covenant, which required superannuation funds to develop strategies addressing members' retirement income needs. These products — sometimes called Comprehensive Income Products for Retirement, or innovative retirement income streams — combine elements of the ABP and the lifetime annuity. Common structures include an ABP paired with a deferred lifetime annuity that begins paying at a nominated age (such as 80 or 85), providing flexibility during earlier retirement years and longevity protection for later; pooled longevity products where members share longevity risk as a group; and investment-linked annuities that offer some market participation while preserving a lifetime income floor. These products are still evolving, differ significantly between funds, and are not straightforward to compare. A retiree considering one should look carefully at product features, Centrelink treatment, and death benefit provisions rather than relying on broad descriptions.
For most retirees, the right structure is a combination. The ABP provides flexibility and tax efficiency; a lifetime component — whether a traditional annuity or an innovative product — addresses longevity risk. For retirees near the Age Pension assets threshold, the more favourable Centrelink treatment of lifetime annuities under the post-2019 framework adds a further reason to consider an allocation. The proportion allocated to each will depend on the individual's health, life expectancy, other sources of income, tolerance for inflexibility, and estate planning priorities. The decision — particularly the annuity component — is largely irreversible, which makes it worth modelling carefully before committing.
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Key takeaways
- Account-based pensions are the dominant retirement income product — tax-free payments and earnings for members 60+, flexible drawdowns above the minimum, and full estate planning features — but the balance is finite and investment risk sits with the member.
- A lifetime annuity transfers longevity risk to the insurer in exchange for guaranteed income for life, at the cost of inflexibility — once purchased, it generally can't be surrendered for its lump sum, and inflation erodes fixed (non-CPI-linked) payments over time.
- Under the post-1 July 2019 Centrelink framework, lifetime annuities compliant with the capital access schedule have only 60% of the purchase price assessed under the assets test until the day before the recipient's 84th birthday, dropping to 30% after — a meaningfully more favourable treatment than holding the same sum in cash or an ABP.
- Term annuities pay guaranteed income for a fixed period rather than for life, useful for bridging a specific gap like early retirement to Age Pension age, but offer no protection against outliving the term.
- Since 2022, the Retirement Income Covenant has driven new Comprehensive Income Products for Retirement (CIPRs) — combining an ABP with a deferred lifetime annuity, pooled longevity products, or investment-linked annuities — though these products vary significantly between funds and require careful individual comparison.
Frequently asked questions
What is the main weakness of an account-based pension?
The balance is finite and the investment risk sits with the member — drawing income during a market downturn can accelerate depletion in a way that's hard to recover from. For retirees whose ABP is their primary income source and who face a long retirement, this creates genuine longevity risk: the possibility of outliving the money, which an ABP alone doesn't protect against.
How does a lifetime annuity get more favourable Age Pension treatment than cash or an ABP?
Under the framework that applies since 1 July 2019, a capital-access-schedule compliant lifetime annuity has only 60% of its purchase price counted as an assessable asset until the day before the recipient's 84th birthday, dropping to 30% from that point on. Holding the same amount as cash or in an account-based pension counts the full balance, so the annuity's reduced assessment can meaningfully increase Age Pension entitlement for retirees near the assets test threshold.
What's the difference between a lifetime annuity and a term annuity?
A lifetime annuity pays guaranteed income for as long as you live, transferring longevity risk to the insurer. A term annuity pays guaranteed income for a fixed, chosen period only — useful for a specific purpose like bridging the gap between early retirement and Age Pension age, or covering a period of high fixed expenses — but it offers no protection if you outlive that term.
What are Comprehensive Income Products for Retirement (CIPRs)?
CIPRs are a newer category of retirement income product that emerged from the Retirement Income Covenant, which from 2022 required super funds to develop strategies addressing members' retirement income needs. Common structures pair an account-based pension with a deferred lifetime annuity starting at a nominated age like 80 or 85, or use pooled longevity products where members share longevity risk as a group. These products differ significantly between funds and require careful individual comparison of features, Centrelink treatment, and death benefits.