Lifetime income streams, including lifetime annuities and lifetime pensions, pay a guaranteed income for as long as you live. That protection against outliving your savings is valuable in its own right. But for many retirees, the bigger surprise is how differently these products are treated by Centrelink.
Since 1 July 2019, lifetime income streams that meet certain rules have received concessional treatment under both the Age Pension assets test and income test. Only part of the purchase price is counted as an asset, only part of each payment is counted as income, and deeming does not apply. For a retiree whose Age Pension is reduced by the assets test, that treatment can increase their pension from the day the income stream starts.
This guide explains how lifetime income streams are assessed under the means tests, how that compares with account-based pensions and older annuities, and the trade-offs to understand before committing money you cannot easily get back.
Means test treatment at a glance
The table below compares how common retirement income products are assessed for the Age Pension.
| Account-based pension | Lifetime income stream (from 1 July 2019) | Lifetime annuity (before 1 July 2019) | Defined benefit pension | |
|---|---|---|---|---|
| Assets test | Full account balance | 60% of purchase price until the threshold day (or at least 5 years), then 30% | Purchase price, reducing each year towards zero | Generally exempt |
| Income test | Deemed income on the balance | 60% of gross payments | Payments less a deductible amount | Payments less a deductible amount, capped at 10% of the payment |
| Deeming applies? | Yes | No | No | No |
| Access to capital | Full access | Limited, under a capital access schedule | Depends on product terms | Generally none |
| Income lasts | Until the balance runs out | For life | For life | For life |
The contrast between the first two columns is where most of the planning opportunity lies. Moving money from an account-based pension into a lifetime income stream immediately reduces the amount counted under the assets test, and replaces deemed income with a fixed proportion of actual payments.
What counts as a lifetime income stream?
For Centrelink purposes, a lifetime income stream is a product that pays income for the rest of your life, or for the life of you and a reversionary beneficiary. The category includes:
- Immediate lifetime annuities, where payments start straight away, usually issued by a life insurance company.
- Lifetime pensions offered by super funds, which may be fixed, indexed to inflation, or linked to investment returns.
- Deferred lifetime income streams, where you pay now and payments begin at a later age.
To receive the concessional 60/30 treatment, the product must have been purchased on or after 1 July 2019 and must comply with a capital access schedule. The schedule limits how much can be paid out as a lump sum on death or withdrawal, and the limit reduces over time. Products that allow more generous access to capital may be assessed at higher than 60% and 30%.
Lifetime income streams are one of several retirement income options. Our guide to retirement income streams compares them more broadly.
How the assets test works for lifetime income streams
Under the assets test, a lifetime income stream that complies with the capital access schedule is assessed at:
- 60% of the purchase price from the date it starts being assessed until the threshold day, with a minimum period of five years, then
- 30% of the purchase price for the rest of your life.
The assessed value is based on the original purchase price. It does not change as payments are made, and it does not fall as you draw income, unlike an account-based pension.
The threshold day: age 84 or 85
The threshold day is the point at which the assessment steps down from 60% to 30%. It is linked to the life expectancy of a 65-year-old man.
- For lifetime income streams with an assessment day before 1 January 2025, the threshold day is age 84.
- For those with an assessment day on or after 1 January 2025, the threshold day is age 85, following updated life tables.
Existing income streams keep their original threshold day. If you buy a lifetime income stream at an older age, the minimum five-year period means the 60% assessment applies for at least five years before stepping down.
Super money versus savings
How you pay for the income stream affects its treatment before payments begin. If the income stream is purchased with superannuation money, it does not count under the assets test before its assessment day. If it is purchased with savings outside super, the full purchase amount is counted until the assessment day. For an immediate annuity this distinction rarely matters, but for a deferred product it can.
How the income test works for lifetime income streams
Under the income test, 60% of the gross payments from a lifetime income stream are counted as income. If your lifetime income stream pays $10,000 a year, $6,000 is assessed. If payments rise with inflation, 60% of the higher payment is assessed.
Lifetime income streams are not subject to deeming once payments start. This is a key difference from account-based pensions, where Centrelink assumes a set rate of return on the full balance regardless of what the investments actually earn. Our guide to Centrelink deeming rates explains how deeming works.
Your Age Pension is calculated under both tests, and whichever produces the lower pension applies. Our guide on how the Age Pension income and assets test works covers this in detail.
A worked example
Consider a single homeowner aged 67 whose Age Pension is currently reduced under the assets test. They use $200,000 from their account-based pension to buy a lifetime income stream that complies with the capital access schedule, with an assessment day in 2026.
Before the purchase, the full $200,000 counts under the assets test.
After the purchase, only $120,000 (60%) counts until age 85. That reduces assessable assets by $80,000.
Under the assets test, the Age Pension is reduced by $3 a fortnight for every $1,000 of assets above the relevant threshold. An $80,000 reduction in assessable assets could therefore increase the Age Pension by up to around $240 a fortnight, or about $6,240 a year, provided the person remains assessed under the assets test and does not reach the maximum rate.
From age 85, the assessed value falls to $60,000 (30%), a further reduction of $60,000 that could increase the pension by up to around a further $180 a fortnight on the same assumptions.
The income test also needs checking. If the income stream pays $12,000 a year, $7,200 is assessed as income. For most assets-tested retirees, this does not change which test applies, but for those close to the crossover point it can.
These figures are illustrative only. Actual outcomes depend on the person’s other assets and income, whether they are single or in a couple, whether they own their home, and the thresholds and rates in place at the time.
Who benefits most from the concessional treatment
The Age Pension benefit is largest for retirees who:
- Are assessed under the assets test, particularly in the taper range, where each $1,000 of assets removed from assessment increases the pension.
- Are just above the cut-off for a part pension, where a lifetime income stream may bring them back into eligibility, unlocking the pension and associated concessions such as the Pensioner Concession Card.
- Are concerned about longevity, because the means test benefit sits alongside income that cannot run out.
The benefit is smaller or absent for retirees already receiving the full Age Pension, those assessed under the income test, and those with assets so high that even the reduced assessment leaves them ineligible.
For couples, both partners’ assets and income are combined, so the effect depends on the couple’s overall position. Our guide on retirement planning for couples and singles covers how the rules differ.
Lifetime annuities purchased before 1 July 2019
Lifetime annuities purchased before 1 July 2019 continue under the rules that applied when they were bought. Broadly:
- Under the income test, payments are assessed less a deductible amount, which represents the return of the purchase price spread over life expectancy.
- Under the assets test, the value starts at the purchase price and reduces each year, typically reaching zero around life expectancy.
Some older complying income streams purchased before 20 September 2007 may be fully or partly exempt from the assets test. Anyone holding a grandfathered product should be cautious about switching or commuting it, because the concessional treatment is usually lost and cannot be regained.
Defined benefit pensions are treated differently again. They are generally exempt from the assets test, with income assessed after a deductible amount that is capped at 10% of the payment. Our guide to defined benefit pensions explains the choice between income and a lump sum.
What happens on death
If a lifetime income stream has a reversionary beneficiary, usually a spouse, payments continue to that person after the original owner’s death. The surviving partner’s means test assessment continues to be based on the original purchase price, and the assessment does not restart.
If there is no reversionary beneficiary, any death benefit is limited by the capital access schedule. In the early years, a significant part of the purchase price may be returned to the estate. Later, the amount reduces and may fall to nothing. Our guide on what happens to your Age Pension and super when your partner dies covers the broader changes a surviving partner faces.
Aged care
The means test for aged care fees generally assesses lifetime income streams in a similar way to the Age Pension, with only part of the purchase price and payments counted. For retirees who expect to need residential or home care in later life, that can reduce means-tested care fees as well as increasing the Age Pension.
Aged care means testing has its own thresholds, caps and transitional rules, so the effect should be modelled specifically. Our guide to means-tested care fees in aged care explains how assets and income affect what you pay.
The trade-offs to understand
The means test treatment is attractive, but it should not be the main reason to buy a lifetime income stream. The product itself has to make sense first.
Your money is largely committed. Once the cooling-off period ends, access to capital is limited and reduces over time. Money placed in a lifetime income stream is no longer available for emergencies, gifts, home repairs or aged care accommodation payments.
Value depends on how long you live. Lifetime income streams provide the most value to those who live longer than average. If you die early without a reversionary beneficiary, the total paid out may be less than the purchase price.
Inflation matters. A fixed payment loses purchasing power over a long retirement. CPI-indexed and investment-linked options address this differently, usually by starting at a lower income. Our article on creating a sustainable retirement income discusses how to balance income today against income later.
The rules can change. Centrelink thresholds, taper rates and means test settings can be amended, and future governments are not bound by today’s settings.
Transfer balance cap. Lifetime pensions started with super money count towards your transfer balance cap. Our article on the transfer balance cap increase to $2.1 million explains the current limit.
Counterparty risk. Annuities issued by life insurers are regulated by APRA, but they are not covered by the government’s Financial Claims Scheme for bank deposits. Your income depends on the provider meeting its obligations.
How much to allocate
Few retirees should put all of their savings into a lifetime income stream. A common approach is to use part of the portfolio to secure a base level of income for life, alongside the Age Pension, and keep the rest in an account-based pension for flexibility, growth and access to capital.
The right proportion depends on your essential spending, your other sources of income, your health and family longevity, how important leaving an inheritance is to you, and how you feel about market risk. Lifetime income can also reduce the pressure to sell growth assets during a downturn, which is discussed in our guide on protecting retirement income during market downturns.
Where professional advice adds value
The Centrelink treatment of lifetime income streams is generous, but it interacts with almost every other part of a retirement plan: the Age Pension, aged care, tax, estate planning and how the rest of your savings are invested. The difference between a well-sized lifetime income stream and a poorly sized one can be worth tens of thousands of dollars over a retirement, and the decision is difficult to reverse.
A financial adviser can model your Age Pension entitlement with and without a lifetime income stream, compare the products available, and work out how much to allocate so that you gain the means test benefit without giving up the flexibility you will need later. If you hold an older annuity or a grandfathered income stream, an adviser can also help you understand what you would lose by changing it.
If you would like to explore whether a lifetime income stream suits your retirement, our retirement planning advisers in Adelaide can help you work through the numbers.
Frequently asked questions
How much of an annuity counts under the Age Pension assets test?
For a lifetime income stream purchased on or after 1 July 2019 that complies with the capital access schedule, 60% of the purchase price counts under the assets test until the threshold day, with a minimum of five years, then 30% for life. The threshold day is age 84 for income streams with an assessment day before 1 January 2025, and age 85 for those from that date.
Are lifetime annuities deemed by Centrelink?
No. Once payments start, lifetime income streams are not subject to deeming. Instead, 60% of the gross payments are assessed under the income test. Account-based pensions, by contrast, are deemed to earn a set rate of return on the full balance.
Do the 60/30 rules apply to annuities bought before 1 July 2019?
No. Lifetime annuities purchased before 1 July 2019 keep the rules that applied when they were bought, with income assessed after a deductible amount and an asset value that reduces over time. Some older income streams bought before 20 September 2007 may be partly or fully exempt from the assets test.
Can buying a lifetime annuity increase my Age Pension?
It can, particularly if your Age Pension is currently reduced under the assets test. Because only 60% of the purchase price is counted, assessable assets fall immediately, and each $1,000 reduction can increase the pension by up to $3 a fortnight. The outcome depends on your full financial position and which test applies to you.
What is a capital access schedule?
It is a set of limits on how much of the purchase price can be returned as a lump sum on death or withdrawal, reducing over time. A lifetime income stream must comply with the schedule to receive the concessional 60/30 means test treatment. Products that allow greater access to capital may be assessed at higher rates.
What happens to the Centrelink assessment if I die?
If the income stream reverts to a spouse, payments continue and their assessment carries on based on the original purchase price. If there is no reversionary beneficiary, any death benefit is limited by the capital access schedule and is paid to your estate or beneficiaries.
Do the same rules apply to aged care fees?
The aged care means test generally assesses lifetime income streams in a similar way, counting only part of the purchase price and payments. This can reduce means-tested care fees, but aged care has its own thresholds and rules, so the effect should be modelled for your circumstances.
General advice warning. This article contains general information only and does not take into account your objectives, financial situation or needs. It is not a recommendation to purchase any financial product. Centrelink and aged care means test rules, thresholds and rates are subject to change and are indexed regularly. Examples are illustrative only and based on simplified assumptions. Lifetime income streams limit access to your capital and may not suit everyone. You should read the relevant product disclosure statement, consider whether the information is appropriate for you and seek personal financial advice before acting on any of it. Money Path Pty Ltd is a Corporate Authorised Representative (No. 001306822) of Australia National Investment Group, AFSL 522028.
