The Challenge of Maximising the Value of Retirement Income

In January 2025, the Grattan Institute published Simpler Super: Taking the Stress Out of Retirement , a report highlighting a growing disconnect between the structure of Australia's superannuation system and the way retirees actually use it.

Despite having accumulated sufficient savings, many retirees are reluctant to draw down their super and instead choose to preserve their capital—turning superannuation into a de facto inheritance vehicle rather than  to fund their retirement.

To counter this, the report proposes a default retirement strategy where 80% of super balances above $250,000 are converted into a lifetime annuity, with the remainder kept in an account-based pension for flexibility. The authors argue this could increase retirees’ incomes by up to 25% and reduce financial stress.

While many agree with the diagnosis—that Australia’s retirement system is complex and underutilised—the proposed solution of widespread annuitisation is not universally accepted.

The reality is that there is no one-size-fits-all answer in retirement planning, particularly in a system where the Age Pension operates as a powerful safety net and interacts significantly with other income sources.

The compounding complexity of income streams

The Age Pension is a government-funded, inflation-protected payment designed to ensure a minimum standard of living in retirement. On its own, it is relatively logical, with entitlements determined by income and assets tests.

In practice, however, retirees rarely rely on a single income source. In addition to the Age Pension, most draw from superannuation (usually as an account-based pension), private savings, employment income, and occasionally a longevity product such as a lifetime annuity. The interaction between these components introduces significant complexity — creating scenarios where one decision can have counterintuitive effects on a retiree’s finances.

Take, for instance, a 70-year-old who works part-time for a community charity. During peak periods, their employer asks them to increase their hours. However, doing so would reduce their Age Pension — effectively taxing their additional income.

Once the cost of commuting and effort are accounted for, they may find little incentive to take on more work.

Now, consider a retiree with $1 million in superannuation. If they use part of it to purchase a lifetime annuity, only a portion of the purchase price is assessed under the assets test, potentially increasing their Age Pension eligibility in the early years. However, once the annuity begins paying income, these payments are included under the income test—possibly reducing their Age Pension later in life. In some cases, the initial boost in pension eligibility may be outweighed by future reductions, making the net benefit difficult to assess without complex modelling.

These interactions between retirement income and means-testing rules complicate any effort to define a “default” strategy that maximises the value of retirement income. What appears to be an optimal choice for one retiree may be sub-optimal for another.

The role of risk tolerance in the retirement income strategy

Beyond the Age Pension interaction, the value of longevity products also depends on the retiree’s personal risk tolerance, which may be expressed as their minimum acceptable standard of living, and their maximum acceptable probability of getting to that point.

Hence, the risk tolerance can be defined as the accepted risk of relying on “essential income” with a certain probability.

For someone who is highly risk-averse, securing this essential income through a combination of Age Pension and a longevity product may be very attractive as it would be a lot more costly to “self-insure” against the risk of living longer than expected.

By contrast, a risk-tolerant retiree, who is comfortable with the idea of a smaller income with a greater probability, may find the same longevity product offers little value, especially as it restricts access to capital.

First, demonstrate the value

This brings us to a crucial challenge for longevity product providers: before promoting any solution, they must demonstrate that their product adds value.

This value cannot be assessed in isolation. It depends on Age Pension eligibility, income allocation and individual risk preferences. And in some cases, simulations may show that a product adds no  value at all.

Some examples illustrate the diversity of outcomes:

• A retiree with $150,000 in super is likely to receive a full Age Pension regardless of what they do with their super. If they are comfortable relying on it to cover essential expenses, annuitising their super offers little benefit relative to the loss of flexibility.
• A retiree with $3 million in assets will be ineligible for the Age Pension. Unless they explicitly intend to fully deplete their assets by the time they reach the end of their life, a longevity product may not add much financial peace of mind or expected additional income once fees have been taken out.
• A retiree with $600,000 in super sits in a more complex middle zone. Here, Age Pension entitlements vary depending on the drawdown structure and income allocation between different sources. For these retirees, the potential benefit of a longevity product must be carefully modelled using their individual risk tolerance, but it should not be assumed.

The broader implication: Complexity undermines confidence

The interactions of Age Pension rules with other sources of income (allocated pension, employment, longevity products) create a retirement system that is difficult to navigate and hard to optimise.

For many Australians, this complexity undermines their confidence to make decisions and encourages overly cautious behaviour—leading to under-consumption and excessive preservation of capital.

Australia offers a fascinating case study in retirement system design, where longevity products that appear sound in theory must demonstrate real-world value—recognising that Age Pension eligibility and individual risk tolerance can lead to vastly different outcomes across different retirees for the very same product proposition.

Actuaries working on product design, retirement modelling, or policy evaluation have a critical role to play. We cannot simply assume that a longevity solution leaves all retirees better off. We must prove it—quantitatively, transparently, and individually.

Only then can we truly take the stress out of retirement.