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Lifetime Income Products: The Case for Humble Australia
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As a longevity actuary, I often hear that lifetime income products are “too expensive” or offer limited value for retirees who already receive the full Age Pension.
The reasoning is familiar. If a retiree’s essential income is largely covered by the government, why pay for an additional income guarantee, especially one seemingly designed for higher-wealth retirees? On top of that, purchasing a lifetime income stream might even reduce their Age Pension entitlement.
Lifetime income products do, in fact, serve middle or upper-middle Australia. These are retirees on the partial Age Pension, who rely on both public and private income sources to maintain their lifestyle. For this group, lifetime income products are not only useful — they are economically efficient.
The reason lies in the means-test treatment of lifetime income streams. Because only 60% of the purchase price and 60% of the income are assessable under the Age Pension means-test, lifetime income streams can usually improve Age Pension entitlements. This makes such products particularly attractive for retirees entitled to partial Age Pension (as detailed in: Assets test, for Age Pension - Age Pension - Services Australia ) or close to being entitled to partial Age Pension.
By contrast, it’s true that there is no Age Pension incentive for someone already receiving the full amount. In fact, above the $9,500 annual income threshold for a single, additional investment into a lifetime income stream can reduce Age Pension eligibility, effectively penalising the retiree for improving their income security.
This creates a structural inefficiency in the system: at around $150,000 of investment into a lifetime income for a 70-year-old single retiree with up to $400,000 in assessable assets, the marginal Age Pension effect becomes negative.
Beyond that point, every dollar invested in a lifetime income reduces Age Pension entitlement, making the transaction appear unattractive, even if it was a rational decision to make outside Age pension considerations.
The policy intent of Age Penson is noble - to target support where it’s needed most, but the effect is perverse. The Age Pension taper discourages precisely the kind of financial decision that could help retirees meet their essential spending needs sustainably. For example, a retiree needing more than $40,000 per year to cover essential expenses may realise that without longevity protection, they will likely need to draw down from their super faster than is sustainable over a 20-year horizon. The Age Pension settings, however, subtly nudge them away from fully insuring their essential spendings over their lifetime.
That said, the incentive threshold is not negligible. The previously mentioned retiree can still invest up to around $150,000 in a lifetime income product without any reduction to their Age Pension entitlement, a fact sometimes overlooked in discussions about the perceived inefficiency of these products. This creates a valuable opportunity for lower-wealth retirees to strengthen their income foundation and gain peace of mind, without facing any financial disadvantage under the means-test.
Now, what about the argument that lifetime income products are “not designed” for more disadvantaged retirees — those with shorter life expectancies or poorer health?
This is an issue actuaries have been actively trying to address in recent months by developing differentiated buckets of mortality assumptions for the less advantaged, recognising the well-established link between mortality risk and socioeconomic factors.
Chronic health conditions such as diabetes, for example, are disproportionately prevalent among lower socioeconomic groups. The idea is to explicitly account for these associations when constructing life expectancy buckets, ensuring a fairer and more realistic representation of longevity across the population.
Having acknowledged that — and being actively involved in developing differentiated mortality assumptions — two important counterpoints should be made.
It’s true that socioeconomic differences in mortality exist in Australia, as in every developed country. But they can be overstated in the decision-making process, particularly when used to argue that lifetime income products unfairly favour the wealthy.
When a country achieves very high national life expectancy — as Australia has — it’s not because everyone lives three to five years longer than their socioeconomic peers elsewhere. Rather, the difference comes from compressing the tail — lifting the life expectancy of the less advantaged segments.
For example, Australians live around four years longer on average than Americans. Yet the most advantaged Australians do not live four years longer than the most advantaged Americans; their life expectancies are remarkably similar. The gap exists because the less advantaged Americans have much shorter lives than their Australian counterparts.
In other words, Australia’s world-class healthcare system and social infrastructure have helped narrow the socioeconomic gradient in mortality. The life expectancy gap between the top and bottom groups is around two to three times smaller than in the United States.
This matters because lifetime income products are typically aimed at the upper-middle segment — not the very wealthy, who don’t need lifetime income anyway.
For a retiree with a modest nest egg who can afford to allocate, say, $100,000 to $150,000 into an income-for-life product, their life expectancy is not vastly different from that of the upper-middle segment that such products traditionally target. The differences in longevity between the “lower-middle” and “upper-middle” groups in Australia are relatively small compared to the stark divide between the “middle” and “bottom” 10% of the population, who have no super to invest anyway.
For this reason, lifetime income products can be an equitable part of the retirement system even for humble retirees, if their essential spendings were not covered by the Age Pension.
When evaluating a lifetime income product, it’s tempting to compare the expected value of the payments received to the amount invested. But that misses the essence of what longevity protection is actually buying.
What matters is not so much the expected value of the income, but what it would cost to self-insure the same level of income against the risk of living too long.
To guarantee that you will not run out of money, you would need to plan for a time horizon beyond your statistical life expectancy.
For example, a 70-year-old male in Australia today might have a life expectancy of around 16 years, but he has a one-in-four chance of living past age 90, and a one-in-ten chance of living past 95.
A retiree who wishes to self-fund an income until age 95 would need to set aside over 10% more, invested at 5% p.a., to get the same income as what a lifetime income stream would be able to achieve.
When individuals try to self-insure, they must over-save — tying up capital that might never be needed. A lifetime income product, by contrast, allows retirees to share that risk efficiently across a large pool. In that sense, the question is not “Will I get my money’s worth?” but “How much would it cost me to be certain that I’ll not run out of essential spending if I live a long life?”
This framing is particularly relevant for low-wealth retirees who may not be able to afford running out of income. A lifetime income product can allow them to spend more confidently from the rest of their super, knowing that their essential income is guaranteed for life. It transforms retirement from a budgeting exercise into a sustainable lifestyle plan.
Lifetime income products may indeed be most naturally suited to upper middle-wealth Australians, who benefit from the Age Pension’s concessional treatment and find these products economically efficient.
For this group, the interaction between private income and public support creates a sweet spot where both financial and behavioural outcomes are optimised. At the same time, more should be done by lifetime income providers to offer fairer pricing for disadvantaged groups.
Advances in differentiated mortality modelling, an area some of us have been developing or promoting, now make it possible to reflect socioeconomic differences more accurately and deliver better rates to those who need income security most.
However, these products should not be overlooked by more modest retirees seeking peace of mind for their essential spending. Even when the Age Pension provides a strong income floor, a small allocation to lifetime income, sitting below the concessional income-test threshold to remain Age Pension neutral, can meaningfully enhance financial security and confidence in retirement by providing a regular income that is still significantly higher than what they would get using a self-insurance strategy.
