Despite the lingering legacy issues that frame them as low value, Richard Leckey general manager at Optimum Pensions, argues that lifetime annuities in 2025 are better place than ever to address the systemic hurdles confronting Australia’s retirement system.
While 59% of retirees admit to having never heard of lifetime annuities, Leckey believes they’ll go a long way to addressing two key issues constantly keeping retirees awake at night.
These include longevity risk and uncertainty around how to draw down income without running out of capital.
With that in mind, Azzet asked Leckey to unpack his views around the role new-look lifetime income streams can play in a retiree’s portfolio.
Azzet: The vast majority of retirees who die with significant net wealth intact suggest they could have enjoyed better retirement lifestyles if they’d only known how long their money would last. How can lifetime annuities change that?
Richard Leckey (RL): Despite the push back from super funds, there’s now broad industry consensus that a lifetime income stream - which provides the certainty of income for life that retirees currently lack - would complement the flexibility and access to capital that an account-based pension (ABP) currently offers.
Azzet: How many entities offer lifetime annuities in the Australian market?
RL: There are currently 15 entities – insurance companies, super funds and platforms – providing annuities in Australia. A lot of these providers would be offering the Challenger product, which accounts for around 78% of total market share.
However, there have been a number of new market entrants in the last few years and next year Australia Super plans to follow Generation Life which brought its own products to market in 2022.
Then there are providers like Australia Retirement Trust, AMP and more recently Allianz with its Retire product which also offers introduces guaranteed income for life. While Challenger will continue to benefit, we also expect the market share of all product offerings to grow strongly.
Azzet: Can you explain the favourable means test benefits associated with lifetime annuities?
RL: As part of the government incentive to promote retiree uptake, the money you put into lifetime income streams has a 60% asset weighting.
Based on our numbers, for every $100,000 retirees put into a lifetime income stream, they get $14,000 in age pension in the first six years.
That’s a big uplift in the age pension, assuming retirees remain eligible for the age pension.
However, by putting a portion of their money into a lifetime income stream, those people who were previously above the threshold can be brought down into the means-tested age pension, which means they also get the healthcare card and all that good stuff.
So it’s a pretty powerful and important thing for retirees to get a better deal on an age pension.
Azzet: What exactly do assessable assets/income include and what are the current upper thresholds for retirees?
RL: 'Assessable assets' include account-based pensions (super), cash, term deposits, shares, investment properties, cars and household contents. Assessable income includes: Employment income (excluding a 'work bonus'), investment income (including 'deemed income' from super balances, bank deposits & shares), rent.
The upper thresholds for a Australian homeowner couple being eligible for any Age Pension are as follows:
- Maximum assessable assets (excluding the home) = $1,047,500
- Maximum assessable income (combined) = $99,746.40.
The upper thresholds for an Australian non-homeowner couple are:
- Maximum assessable assets (excluding the home) = $1,299,500
- Same as for homeowners
Azzet: What percentage of retiree assets are currently going into a lifetime income stream and how do you expect this to grow?
RL: The amount of money currency going into lifetime annuities is low at under 2%. This is due to either limited retiree understanding of how they work and/or unawareness of what they now offer relative to low-value legacy products.
We expect life annuities to grow to 12% of retirees' assets over the next 10-15 years. Much of this growth will be driven by growing market realisation that the legacy view of annuities is no longer valid.
The legacy view was that A) a traditional fixed interest-style annuity was really poor value when Australia had low interest rates, B) if a retiree died after one year all the money was left in the pool.
But that’s not the case anymore. Every type of annuity has a death benefit period, and new innovative retirement income streams can be high performing and investment linked.
We believe the right average mix for a life time income stream would be between 20-50% with the remainder in an account-based pension.
Azzet: What role do you see government or advisers having in the uptake of life time income streams?
RL: It’s a combination of the push and the pull. On the demand side there’s the growing acceptance of life time income streams being seen as a success and advisers getting into it as good idea.
Then there’s the push which is the government mandating that there are soft-spots where people are being guided to be offered life income streams.
If both of these outcomes happen, the uptake of lifetime income streams will accelerate.
