Building sustainable retirement income in Australia

Retirement should be a time of rest and relaxation. A well-earned break after decades of diligence and dedication. However, one of the biggest fears for many Australians nearing and entering retirement is longevity risk — the possibility of living longer than expected and savings, pension or other income streams not lasting until the end of life.

Australians are typically retiring with more money than ever thanks to a long-standing superannuation regime, but on average they are also living longer.

Treasury’s Intergenerational Report 2023 projects that Australia’s average life expectancy will continue to steadily increase. Over the next 40 years, the number of people aged 65 and over is expected to more than double, and the number aged 85 and over will more than triple.

Generating a sustainable income stream to fund rising living expenses and the cost of aged care support later in life will be a challenge for many.

Missing annuities products

The Morrison government introduced the Retirement Income Covenant, which took effect from 1 July 2022. It codified the obligation for superannuation trustees to outline how they will assist their members to balance maximising their retirement income, manage risks and have flexible access to savings.

To date, the product offerings from superannuation funds at the retirement end of the spectrum have largely been confined to transition to retirement (TTR) and account-based pension (ABP) products.

A key offering that has been missing for a long time has been the widespread availability of annuities products that provide retirees with a guaranteed lifetime income stream. Lifetime income products deliver income for life paid out of pooled capital, investment earnings and “mortality credits”, which arise because the assets of those who die are passed onto survivors in the pool.

To access these types of products, currently most superannuation members need to roll over their savings to external annuity product providers.

Treasury guidance released in May 2026 provides a range of non-binding best practice principles for superannuation funds that include designing and offering lifetime income products directly to their members. The guidance says these products should “have regard to member preferences around expected risk and return, for example managing longevity or investment risk”.

Professor Susan Thorp, head of banking and finance at Monash Business School, says Australia’s Retirement Income Covenant and policy discussion has long emphasised the importance of adding a longevity insurance component to retirement income products.

“If you are familiar with the research on voluntary annuitisation around the globe, it earned its own title, ‘the annuitisation puzzle’, because voluntary annuitisation was rare and occurring at very low rates,” Thorp says.

One of the concerns around annuities is the prospect of forfeiting one’s invested capital to the product provider when one dies.

Most Australian annuity products have a built-in death benefit option. Typically, that part of the purchase amount not paid out as income is paid as a death benefit to an estate thereafter if the investor dies prior to their life expectancy.

Thorp says education about annuities is important. However, she adds that research undertaken in Australia, the US and other countries demonstrates that people’s decisions about annuities are “very sensitive” to the way that they are framed.

“It is pretty clear that if you leave people to themselves and you offer them a standard life annuity, most people would not buy it. No amount of education will solve the problem entirely, so it will move some people at the edges, but it does not resolve the puzzle.”

In a 2025 report titled Simpler super: Taking the stress out of retirement, Australia’s Grattan Institute argues that retirees should be encouraged to use 80 per cent of their super balance above A$250,000 to purchase an annuity.

The remaining super balance — A$250,000, plus the remaining 20 per cent of any savings above that level — would continue to draw down via an account-based pension. Retirees would still have to access their super for large purchases, if needed.

The report says that “the government should embed this pre-set guidance throughout the retirement income system, in all relevant communications with retirees, and at all critical decision points”.

The APAC perspective

Other countries have compulsory annuitisation schemes. For example, Singapore’s Central Provident Fund is a mandatory social security and pension savings scheme for working Singapore citizens and permanent residents.

Funded by monthly contributions from both employers and employees, it is designed to help individuals and families fund their retirement, home ownership and healthcare needs. After age 65, individuals can apply to start receiving lifelong monthly payouts using their accrued retirement savings.

Elsewhere in the Asia-Pacific region, private sector employees and non-pensionable public sector employees in Malaysia contribute to provident funds, with social assistance paid to those with insufficient income. China has a three-tier pension system, consisting of a basic defined benefit pension, a mandatory second-tier plan and a voluntary third-tier scheme.

 

"I am hopeful that, once we progress to super funds offering comprehensive retirement solutions to members as a package, lifetime income products will see much more interest and take-up."

 

Australia’s A$4.5 trillion superannuation system mandates compulsory contributions by employers, but it is ultimately up to individual members to decide what they do with their money once they move into the retirement phase.

Research published in 2025 by the New York-based TIAA Institute analyzing the retirement systems of 11 countries found that Australia was still in the early stages of implementing its income covenant requiring superannuation fund trustees to formulate, regularly review and give effect to a retirement income strategy for their members.

Until recently, UniSuper and ART were the only superannuation funds directly offering lifetime income products, although some make products available from outside providers. New products have recently been launched by MLC and AMP, and other funds are now well advanced in developing and launching their own lifetime income solutions. 

“It is likely that these new solutions will take time to gain significant adoption, particularly as the rest of the retirement infrastructure will need time to develop,” notes the TIAA Institute.

Dr Geoff Warren, research fellow at the Conexus Institute and honorary associate professor at the Australian National University, says that while there are a lot of new products being developed, “traditionally, the take-up of annuities has been abysmal”.

Warren co-authored a research paper, released in January, titled Investment-linked lifetime income streams: Exploring the (considerable) benefits for super fund members. Among the key findings were that investment-linked lifetime income streams (ILLIS) have the potential to deliver higher and more sustainable income returns than ABPs.

“Modelling shows that splitting assets at retirement between an ABP and an ILLIS could increase expected income by between 3 per cent and 24 per cent depending on assumptions such as the retiree’s available assets and whether the ILLIS allocation is made at retirement or during accumulation,” the report states.

Warren notes superannuation funds can benefit their members by packaging products into solutions that combine lifetime annuity income streams with ABPs, enabling both regular income and access to lump sum withdrawals.

“If you present the member with that and say, ‘Look, we think this package is right for you’, that would be a gamechanger,” he says. “I am hopeful that, once we progress to super funds offering comprehensive retirement solutions to members as a package, lifetime income products will see much more interest and take-up.”

Another selling point is that, for Age Pension eligibility purposes, the value of any money invested in a lifetime income products is discounted by 40 per cent, Warren says. This means that retirees exceeding the assets test limit could become eligible for the Age Pension if they invest in lifetime income product, and that those already receiving a part Age Pension may receive even higher pension payments.

The 2026 Challenger Retirement Happiness Index found that 76 per cent of Australians aged 60 and above would feel happier with the security that a guaranteed income for life can bring. 

“Our superannuation system is world-class at building retirement savings, but it is still a work in progress when it comes to delivering sustainable incomes in retirement,” Challenger’s chief financial officer, Alex Bell, says. When people stop working, risks like longevity, market timing (sequencing risk) and inflation become much more real, and a guaranteed income directly addresses those.

Bell believes that annuities and account-based pensions are complementary, and the most effective retirement plans combine both. “What is encouraging is that retirees and their advisers are combining different income types within a broader plan rather than relying on a single product,” she says. “An account-based pension provides flexibility and access to capital, with returns linked to markets.”

Bell says using annuities in the defensive sleeve of a portfolio provides certainty around income, the potential benefit to Age Pension entitlements, and in many cases increases the estate balance — which is contrary to popular belief.

“The primary barrier is awareness,” she says. “Challenger research found that 59 per cent of Australians aged over 60 do not know about, or have not heard of, lifetime income streams as a retirement strategy.”

A safety net

Theo Marinis CPA, director and financial strategist at Marinis Financial Group, says he cannot recall any of his clients asking about starting lifetime income streams. However, he has suggested them to some. A recent case was a widow who could have used the 40 per cent assets test discount on funds held in an annuity to receive higher Age Pension payments.

“For those that need extra cash flow, it does make sense,” Marinis says. “There is actually a place for it, but you have got to sell it — people are not asking for it. As an adviser, you have to explain the benefits to them.”

 

"[Australia’s] superannuation system is world-class at building retirement savings, but it is still a work in progress when it comes to delivering sustainable incomes in retirement."

 

Super Consumers Australia deputy CEO, Dr Katrina Ellis, says that with the median superannuation balance of retirees at age 65 around A$200,000, the majority will be reliant on receiving either part or full Age Pension payments every fortnight.

“As you spend down your assets, you become eligible for it. The thing that we say is everybody should contact Services Australia and test their eligibility for the Age Pension,” she says. “The Age Pension and government support is still there as the foundational pillar of income in retirement, and it is there for everyone once you meet the means testing.”

Simplification is needed

Ellis says a major frustration is that while low-touch MySuper default accounts have worked well for those in the accumulation phase, there is no default offering to retirees.

“The way the system works at the moment, at the point you want to retire, it suddenly becomes really complicated. And the default when you retire — if you do nothing — is you stay in accumulation.

“We have this incomplete system, and the final frontier of retirement income is still yet to be solved. The policy settings are not there right now to make sure that the whole thing works seamlessly for people.”

Ellis says there should be an automatic continuation of MySuper where superannuation trustees work out “a sensible drawdown strategy” that would be sustainable over a person’s life. “Wouldn’t that be great? But that is not how the system works.”

The use of an annuity solves longevity risk, but an account-based pension combined with the Age Pension will probably suit most people anyway, she says. “Other countries around the world have had mandatory annuitisation and so it is a norm that everybody buys an annuity. But in Australia, annuities have struggled to sell because it is too complex.”

 

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