Difference between annuities and account-based pensions

The key differences between two retirement incomes.

Annuity vs account-based pension

Upon retirement, Australians can choose how to draw an income stream from their superannuation savings. Some opt to buy annuities and others rely on an account-based pension. Here are the key differences.

Although there are different types of annuities on offer, the two main types are lifetime and fixed term annuities.

Basically, an annuity is an investment that delivers a secure, regular payment over a known period in return for an upfront investment, which can be as little as $10,000. You can choose whether to receive this regular payment on a monthly, quarterly, six monthly or annual basis.

Although these payments are generally fixed, they can be indexed partially, or fully, in line with inflation, or at a fixed rate, depending on the type of annuity.

As the name suggests, a lifetime annuity provides secure, regular income for the rest of your life or the life of a second person, such as your spouse.

In the past, if you put your money into a lifetime annuity, it would be locked away and you wouldn’t be able to access it. But today’s lifetime annuities are more flexible and offer greater options for accessing your money if you need it.

Within a lifetime annuity, you can choose the level of capital you have access to, the level of indexation and the frequency of payments, and you can choose to maintain control over your estate outcomes.

There are different options to select from within the annuity, and a financial adviser can help you figure out what best suits your own situation.

A fixed term annuity provides secure, regular income for a fixed term of your choice – which could be one year, or up to 50 years. With a fixed-term annuity, you can choose to have your initial capital investment returned to you at the end of the agreed term or as part of your regular payments throughout the investment period.

Like the lifetime annuities, there are different options around indexing to keep up with inflation, payment frequencies, and leaving the annuity to someone when you pass away, so it’s best to go through all of these with a financial adviser before you invest.

As well as the certainty of a regular income, there are other benefits to purchasing an annuity, which include:

  • they are not affected by the swings in share markets
  • they are tax-free if bought with superannuation funds after the age of 60
  • you have control over estate planning outcomes via the nomination of beneficiaries.

Account-based pensions
If you are considering retiring or transitioning to retirement, you have the option of opening an account-based pension.

This will provide an income stream based on your superannuation savings, but only if you have reached preservation age.

Preservation ages depend on when you were born, as follows:


An account-based pension pays income in retirement or, if you are still working, it can supplement your wages.

Some working individuals may be able to draw income from an account-based pension and salary-sacrifice an amount from their wages into superannuation to legitimately lower their taxes.

The account-based pension is opened with a lump sum from your super account.

There are some conditions that must be met: for example, permanently retiring from the workforce after reaching preservation age, reaching age 65, or becoming totally and permanently disabled.

If you intend to keep working, you need to start a transition-to-retirement pension (TTR) in order to access part of your super through an account-based pension.

Under these circumstances, the sum you deposit in the account must be a minimum of four per cent and no more than 10 per cent of your super balance. You cannot withdraw a lump sum if you are still working. Rather, the amount that goes into your account-based pension creates an income stream.

Your TTR pension can be rolled back into your super accumulation account at any time, according to MoneySmart.

Account-based pensions are not guaranteed to last for a set period of time. How long your pension lasts will depend on how much you withdraw each year, the investment returns you receive and the amount of fees you pay.

To calculate how long your account-based pension might last, use the calculator on the MoneySmart website.

Before deciding to open an account-based pension, speak to an adviser from your superannuation fund in addition to an accredited, independent financial adviser specialising in retirement matters.

Would you consider opening an account-based pension before fully retiring? Or are you likely to buy an annuity?



    To make a comment, please register or login
    9th Jan 2019
    You forgot to mention that the minimum 4 to 10% you must withdraw each year from your account based pension is set by Government depending on your age. Also, yes you have to be permanently retired at the point which you start it, but if later you go back to work, you still receive the account based pension. Its tax effective because over 60 you don’t need to declare it on your tax return. Tax free. Most super funds also allow you to draw a lump sum from your account based pension, which is useful for big expenses which may arise. TTR pensions are no longer that attractive with change of rules on 30 June 2017 when tax exemption on pension fund earningswas removed
    almost a grey hair
    9th Jan 2019
    If you take out an allocated pension over 60 but under age pension age and you need the services of Centrelink in the form of Newstart then Centrelink considers your regular payments as income. In my situation my wife who is older will receive the full oap at half the couple rate currently $690 f/n then when she starts on the pension I will suddenly be looking for full time employment as not having any income, As my super in accumulation phase is not considered an asset until I reach oap age. Of course I can still take lump sums from my fund min $2000 at a time without even having to declare it. Happy days eh

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