A guide to lifetime annuity payment options

By Sean Howard , Technical Services Manager

Challenger’s lifetime annuity offers a range of payment options to help retiree clients achieve their objectives. Challenger provides immediate and deferred payment options which can be linked to the Consumer Price Index (CPI) or RBA cash rate and market-linked payment options.

In this month’s article we will look at which payment options to consider for different retirement objectives. Projections for the case studies are taken from the Challenger Retirement Illustrator with default assumptions as at 15 January 2024.

Immediate payments

Regular payments for the immediate payments option commence a month after the investment date and continue to be paid monthly for the life of the investor (and their spouse if nominated as a reversionary).

Regular payments can be indexed in line with changes in the CPI, partial changes in the CPI, changes in the RBA cash rate or not indexed at all. If there is a change in the CPI, the payments for the CPI and partial CPI options will change after the investment anniversary. If there is a change in the RBA cash rate, the payments will change in the following month.

The immediate payments option accepts ordinary and superannuation money which is unrestricted non-preserved. For superannuation money, the investor must be aged 60 years or older at the time of the investment.

The immediate payments option may be appropriate for retiree clients who want to invest part of their portfolio to receive guaranteed income for life to help meet their essential expenditure.

Deferred payments

The deferred payments option allows investors to defer the commencement of regular payments in exchange for higher starting payments. It is only available for superannuation money investments.

Regular payments commence a month after the chosen deferral period and continue to be paid monthly for the life of the investor (and their spouse if nominated as a reversionary).

The deferral period must be in whole years and payments must commence no later than the investment anniversary after the investor turns age 100 (or nominated spouse turns age 100 if they are older than the investor).

Regular payments can be indexed in line with changes in the CPI, partial changes in the CPI, changes in the RBA cash rate or not indexed at all. If there is a change in the CPI, the payments for the CPI and partial CPI options will change after the investment anniversary. If there is a change in the RBA cash rate, the payments will change in the following month.

The deferred payments option only accepts superannuation money which is unrestricted non-preserved. Investors must be aged 60 years or older and the nominated spouse must be aged 65 years or older at the time of the investment.

The deferred payments option may be appropriate for retiree clients who don’t immediately require income and want to maximise their starting payments from the amount they invest or prefer to allocate less of their portfolio to lifetime annuities.

Case study – Immediate payments vs deferred payments

Sally and Steve are a couple, both age 67 and have recently retired. They own their home and have $300,000 each in accumulated superannuation. They have $50,000 invested in term deposits and $20,000 of personal contents.

Sally and Steve want $75,000 p.a. to fund a comfortable lifestyle in retirement and need $50,000 p.a. to meet their essential expenditure. They roll over their accumulated superannuation into account-based pensions with growth/defensive split of 50/50.

Assuming fixed returns of 4.5% p.a. for defensive assets and 8% p.a. for growth assets, the breakup of their income in retirement is projected below.

Their account-based pensions are exhausted after 23 years and they are solely reliant on the Age Pension which does not provide enough income to meet their essential expenditure.

Their financial adviser recommends they invest 30% of their account-based pensions into lifetime annuities (immediate payments) with payments indexed to the CPI. The growth component of their account-based pensions is increased to maintain their overall growth/defensive split of 50/50.

Assuming fixed returns of 4.5% p.a. for defensive assets and 8% p.a. for growth assets, the breakup of their income in retirement is projected below.

Their account-based pensions are exhausted 3 years later by incorporating lifetime annuities (immediate payments) into their portfolio and the payments from their lifetime annuities and the Age Pension provide enough income to meet their essential expenditure for their lifetime.

Sally and Steve are happy with the projections but they would prefer to allocate less of their portfolio to lifetime annuities. They still want $75,000 p.a. to fund a comfortable lifestyle in retirement and need $50,000 p.a. to meet their essential expenditure.

Their financial adviser recommends they invest 20% of their account-based pensions into lifetime annuities (deferred payments) with a deferral period of five years. The growth component of their account-based pensions is increased to maintain their overall growth/defensive split of 50/50.

Assuming fixed returns of 4.5% p.a. for defensive assets and 8% p.a. for growth assets, the breakup of their income in retirement is projected below.

Their account-based pensions are exhausted 2 years later by incorporating lifetime annuities (deferred payments) into their portfolio and the payments from their lifetime annuities and the Age Pension provide enough income to meet their essential expenditure.

Market-linked payments

The market-linked payments option allows investors to have their regular payments indexed in line with the performance of investment markets.

Regular payments commence a month after the investment date and continues to be paid monthly for the life of the investor (and their spouse if nominated as a reversionary).

Regular payments can be indexed in line with five different market-linked index options; cash, conservative, conservative balanced, balanced and growth. If there is a change in the market-linked index, the payments will change after each investment anniversary.

The market-linked index option can be switched before each investment anniversary and will be effective from the anniversary date. If the market-linked index is switched, the first payment to change by the new index will be after the following investment anniversary (i.e. the 13th monthly payment after the change).

The market-linked payments option accepts ordinary and superannuation money which is unrestricted non-preserved. For superannuation money, the investor must be aged 60 years or older at the time of the investment.

Starting payments can be increased by choosing the Accelerated payment option which increases payments in exchange for reduced future indexation. Future indexation can be reduced by between 1% p.a. and 5% p.a. which will be deducted from the performance of the market-linked index.

The market-linked payments option may be appropriate for retiree clients who want to receive income for life and are happy to accept market risk to maximise the potential upside.

Case study – market-linked payments vs market-linked accelerated payment option

Anne and Anthony are a couple, both age 67 and have recently retired. They own their home and have $500,000 each in accumulated superannuation. They have $50,000 invested in term deposits and $20,000 of personal contents.

Anne and Anthony want $80,000 p.a. to fund a comfortable lifestyle in retirement and are happy to accept market risk to maximise the potential upside. They roll over their accumulated superannuation into account-based pensions with growth/defensive split of 50/50.

Assuming fixed returns of 4.5% p.a. for defensive assets and 8% p.a. for growth assets, the breakup of their income in retirement is projected below.

Their account-based pensions are exhausted after 23 years and they can no longer fund a comfortable lifestyle in retirement as they are solely reliant on the Age Pension.

Their financial adviser recommends they invest 20% of their account-based pensions into lifetime annuities (market-linked payments). The conservative balanced index option is chosen to maintain their overall growth/defensive split of 50/50.

Assuming fixed returns of 4.5% p.a. for defensive assets and 8% p.a. for growth assets, the breakup of their income in retirement is projected below.

Their account-based pensions are exhausted 9 years later by incorporating lifetime annuities (market-linked payments) into their portfolio increasing the likelihood that they can continue to fund a comfortable lifestyle in retirement.

As an alternative, their financial adviser recommends lifetime annuities (market-linked accelerated payment) in the conservative balance index with future indexation reduced by 2.5% p.a. The starting payments from their lifetime annuities increase by 35% from $8,306 p.a. to $11,198 p.a.

Assuming fixed returns of 4.5% p.a. for defensive assets and 8% p.a. for growth assets, the breakup of their income in retirement is projected below.

Lifetime annuity payment options summary

For further information on the Challenger Lifetime Annuity (Liquid Lifetime) payment options, see Challenger Lifetime Annuity (Liquid Lifetime) Product Disclosure Statement.

The information in this article is current as at 1 February 2024 unless otherwise specified and is provided by Challenger Life Company Limited ABN 44072 486 938, AFSL 234670 (Challenger, our, we), the issuer of the Challenger annuities (Annuity(ies)) and Challenger Retirement and Investment Services Limited ABN 80 115 534 453, AFSL 295642 (CRISL). The information in this article is general information only about our financial products and is intended solely for licensed financial advisers or authorised representatives of licensed financial advisers, and is provided to them on a confidential basis. It is not intended to constitute financial product advice. This information must not be distributed, delivered, disclosed or otherwise disseminated to any investor, without our express prior approval. Investors should consider the applicable Annuity Target Market Determination (TMD) and Product Disclosure Statement (PDS) available at challenger.com.au and the appropriateness of the applicable product to their circumstances before making an investment decision. This information has been prepared without taking into account any person’s objectives, financial situation or needs. Neither Challenger and/or CRISL, nor any of its officers or employees, are a registered tax agent or a registered tax (financial) adviser under the Tax Agent Services Act 2009 (Cth) and none of them is licensed or authorised to provide tax or social security advice. Before acting, we strongly recommend that prospective investors obtain financial product advice, as well as taxation and applicable social security advice, from qualified professional advisers who are able to take into account the investor’s individual circumstances. Each person should, therefore, consider its appropriateness having regard to these matters and the information in the Target Market Determination (TMD) and Product Disclosure Statement (PDS) for the applicable Annuity before deciding whether to acquire or continue to hold the product. A copy of the TMD and PDS is available at challenger.com.au or by contacting our Adviser Services Team on 13 35 66. Any examples shown in this article are for illustrative purposes only and are not a prediction or guarantee of any particular outcome. Age Pension benefits described in this article will not apply to all individuals. Age Pension outcomes depend on an individual (or couple’s) personal circumstances and may change over time. This article may include statements of opinion, forward looking statements, forecasts or predictions based on current expectations about future events and results. Actual results may be materially different from those shown. This is because outcomes reflect the assumptions made and may be affected by known or unknown risks and uncertainties that are not able to be presently identified. Where information about our products is past performance information, past performance is not a reliable indicator of future performance. Challenger and CRISL relied on publicly available information and sources believed to be reliable, however, the information has not been independently verified by Challenger and CRISL. While due care and attention has been exercised in the preparation of this information, Challenger and CRISL gives no representation or warranty (express or implied) as to its accuracy, completeness or reliability. The information presented in this article is not intended to be a complete statement or summary of the matters to which reference is made in this article. To the maximum extent permissible under law, neither Challenger, CRISL, nor its related entities, nor any of their directors, employees or agents, accept any liability for any loss or damage in connection with the use of or reliance on all or part of, or any omission inadequacy or inaccuracy in, the information in this article. Challenger Life and CRISL are not an authorised deposit-taking institution for the purpose of the Banking Act 1959 (Cth), and its obligations do not represent deposits or liabilities of an authorised deposit-taking institution in the Challenger Group (Challenger ADI) and no Challenger ADI provides a guarantee or otherwise provides assurance in respect of the obligations of Challenger Life.