Craig Hall: What is an annuity?

Annuities are a form of income stream which converts a lump sum of money to a set of regular payments, either superannuation or non- superannuation, over a specific term. They are a cash-based investment and are generally guaranteed by the provider.

They can be available for as little as 12 months, through to the remainder of the annuitant’s life. Different types of annuities include:

  • Term Certain/Fixed Term/Guaranteed – the term is pre-determined and fixed, ranging from 12 months to 50 years;
  • Lifetime Annuity – payments continue to be paid while the annuitant or the reversionary annuitant (e.g. spouse) is alive;

  • Life Expectancy Annuity – the term is based on the life expectancy of the annuitant/reversionary annuitant.

Annuities can come with a number of features and options, such as indexation of the payments at a fixed rate or against the Consumer Price Index (CPI), nomination of a reversionary beneficiary (should you die within the term of the annuity) and the choice of receiving payments monthly, quarterly, half-yearly or annually. Some annuities allow for a Residual Capital Value (RCV) meaning that a pre-nominated amount of capital is available to be paid at the end of the term, up to a maximum amount equal to the purchase price.

Annuities have other potential advantages

  • Payments are not influenced by market downturns.
  • Concessional taxation treatment may apply.
  • Concessional government income support treatment may apply for income test assessment.
  • Concessional treatment for residential aged care fees may apply.

There may also be potential pitfalls:

  • Being cash-based, the investment cannot ‘grow’ and therefore can be subject to the effects of inflation over time.
  • If payments are commenced in a low-interest rate environment, they will reflect that rate until the annuity finishes.
  • Usually the contract cannot be varied once commenced (unless during a cooling-off period).
  • You will generally not be able to access lump sums (commutations).
  • Annuities where commutations are allowed may be subject to restrictions.
  • For lifetime annuities, any residual amount upon death is forfeited, unless a guarantee period is offered and the death occurred within that period.

Craig Hall is an expert in the financial matters facing retirees. If you require further information please contact NICRI toll free on 1800 020 110, or visit

Prior to acting on information provided in our articles, the National Information Centre on Retirement Investments (NICRI) strongly recommends you also confirm with any relevant government department details in relation to your personal circumstances.

Written by craigha