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Retirement Annuities: Pros And Cons Explained

Retirement Annuities: Pros and Cons Explained

An annuity is a contract between an individual and an insurance company, where a lump-sum payment is exchanged for regular payments over a specified period, often for life.

Annuities serve as a valuable tool in retirement planning that may help retirees avoid the risk of outliving their savings. Retirement annuities also offer tax advantages, a diversified retirement portfolio, and provide flexibility to cater to individual preferences and circumstances.

In this article, we’ll discuss the pros and cons of annuities for retirement so that you may make an informed decision when planning for retirement.

Pros of Retirement Annuities

A retirement annuity plan offers several key advantages that may make it a compelling retirement fund option if you’re seeking secure income in retirement.

Advantages of Annuities


Guaranteed Lifetime Income

Even if you would have outlived your initial investment, your retirement annuity plan provides lifelong payments, giving you peace of mind. You can tailor fixed-term and lifetime annuities to your financial goals.

Additionally, the Australian annuity market has addressed common annuity concerns and misconceptions. Many annuities offer a guaranteed death benefit for the annuitant’s estate, making them appealing to retirees and their families.

Protection Against Market Volatility

A retirement annuity plan provides a reliable financial option that shields you from market volatility, ensuring a steady income stream that is not impacted by economic uncertainties.

Moreover, annuities come with tax advantages, where the income generated is generally taxable in the year received. However, individuals often move to lower tax brackets during retirement, potentially reducing the tax burden. 

Additionally, annuities offer the advantage of tax-deferred accumulation, allowing you to earn interest on the money without immediate taxation.

Potential for Higher Returns 

Annuities offer a range of payout options that can guarantee a steady income for life, with the potential for higher returns due to the pooling of risk. 

By spreading risk among a group of individuals, annuities may provide returns that may exceed what one might achieve independently, particularly benefiting those with longer lifespans.

Additionally, various annuity payout options cater to different needs and circumstances, ensuring financial security and a regular income stream throughout retirement.

Cons of Retirement Annuities

Retirement annuity plans provide various benefits, but it’s crucial to consider potential drawbacks and limitations to make informed decisions about retirement income planning.

Disadvantages of Annuities


Loss of Control 

Annuities offer financial security and stable income, but they offer limited flexibility in accessing invested funds.

An annuity provides a guaranteed regular income for a fixed period or the rest of your life in exchange for a lump sum payment. This means that the money used to buy the retirement annuity plan is converted into a stream of income, and you no longer have access to the initial lump sum amount.

Inflation Risk 

Annuities have fixed payments that don’t change over time. However, fixed-income streams are vulnerable to inflation. As prices rise, fixed annuity payments lose purchasing power, impacting retirees’ standard of living.

Opting for an inflation-adjusted annuity provides a solution to this issue. Although they offer lower initial payouts, inflation-adjusted annuities hedge against inflation by increasing payments to keep up with rising living costs.

Potential Complexity 

Annuities come in various forms with different benefits and payment structures. Thus, assessing income competitiveness and product complexity and flexibility is essential before committing.

The tax treatment of annuities varies based on factors like the age at which they are purchased and the source of funds. For example, annuities purchased with super money are taxed differently than those bought with non-super money.

Additionally, annuities may impact both the income and assets test for the Age Pension. How they are treated depends on factors like the type of annuity and the presence of a reversionary beneficiary.

Who Should Consider Annuities?

A retirement annuity plan may be a potential retirement income vehicle for you if you are seeking a guaranteed income stream, especially if you are concerned about longevity risk and financial stability. It also may be suitable for you if you are complementing other sources like a superannuation account-based pension and the Age Pension.

Retirees Seeking Predictability 

The features of annuities make them an attractive option for individuals seeking a reliable and consistent income source during retirement, offering peace of mind and financial security.

What Makes Annuities Attractive Retirement Investments


  • Retirement annuities provide you with a reliable and consistent income stream, offering stability and predictability amidst market fluctuations. 
  • If you are aged 60 and over and purchase an annuity, the income payments and lump sum withdrawals from that annuity are generally tax-free.
  • Annuities may be paid monthly, quarterly, semi-annually, or annually, allowing you to customise your schedule.
  • Indexed annuities help you keep up with rising costs by adjusting payments to inflation.
  • Lifetime annuities provide retirement financial security regardless of longevity.
  • After death, annuities transfer capital to your estate, protecting your family.
  • A lifetime annuity income eliminates the risk of outliving your retirement savings.

Risk-Averse Individuals 

By purchasing a lifetime annuity, you mitigate the risk of running out of savings. This protection is crucial for you given the increasing life expectancy and the challenge of ensuring financial security throughout retirement. 

A lifetime annuity may provide you with a reliable source of income that lasts as long as you live, offering a safety net against the uncertainties of outliving your retirement savings.

Supplementing Other Retirement Income

Retirement annuities may provide lifelong income and financial security, making them essential to your diversified retirement strategy. 

They are unaffected by market fluctuations, making them appealing if you want financial stability without actively managing investments. Annuities for retirement supplement super fund account-based pensions, the Age Pension, and other retirement income streams by providing a steady income. 

Despite limitations like reduced control over investments and fixed-income payments, they may help you secure your retirement finances.

Essential Considerations Before Buying Retirement Annuities

To make informed decisions when purchasing retirement annuities, it’s crucial to conduct thorough research, understand product features, and tax implications, and seek professional advice to make informed decisions.

Types of Annuities 

There are three main types of annuities for retirement: Lifetime Annuities, Fixed-Term Annuities, and Inflation-Indexed Annuities.

Lifetime Annuities offer stability and guaranteed regular income for life. There are two main types of lifetime annuities: level annuities and escalating annuities. 

Level annuities pay the same income forever while escalating annuities start at a lower amount and increase annually in line with inflation or a set percentage. 

Fixed-term annuities pay an income for a fixed-term guarantee period that you choose. It can range from 1 to 25 years. Popular choices include five and ten-year terms. 

Fixed-term annuities are ideal for those who prefer to keep their options open and anticipate future annuity rates to rise, allowing them to secure a higher rate in the future.

Inflation-indexed annuities provide a hedge against inflation by adjusting payments based on the rate of inflation. These annuities start at a lower initial amount compared to fixed annuities but increase over time to keep pace with inflation. 

While they offer protection against the eroding effects of inflation, it may take time for the total income received to match the fixed annuity’s payment.

Deferred Annuities can be either a fixed-term, lifetime, or indexed annuity. A deferred annuity provides a guaranteed income stream that starts at a later date, offering a way to secure income for retirement. 

Reputable Providers 

Annuity products convert savings into regular income, often used at retirement. Life insurance companies failing to fulfil obligations on guaranteed annuity products may cause significant wealth loss, impacting your retirement income, savings planning, and rebuilding ability.

Australia’s regulatory framework, including the Australian Prudential Regulation Authority (APRA), is crucial for consumer protection and financial stability. It monitors and regulates financial institutions, advising consumers to choose annuity providers with strong financial ratings to secure retirement income and protect savings.

Seeking Professional Advice 

Retirement annuity plans are complex financial products that require careful consideration. Before investing, read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) and consult a financial adviser.

A financial adviser can provide tailored advice based on your financial circumstances and goals, helping you understand the complexities of annuities and make informed choices. They can explain the various types of annuities for retirement, their tax implications, and potential tax benefits for individuals aged 60 or older. 

Working with a financial adviser helps you understand how annuities and retirement fit into your financial plan and if they are a suitable investment choice.

Plan Your Retirement with Central Coast Financial Planning Group 

Annuities for retirement are a valuable retirement planning tool, providing a steady income and tax benefits. However, they may not be suitable for everyone due to high costs, liquidity issues, and complexity. Hiring an experienced retirement adviser can help you plan a secure and comfortable retirement. 

If you want to enjoy retirement with peace of mind knowing there is a financial strategy to take care of the future, speak to the team at Central Coast Financial Planning Group

We help our clients enjoy their dream retirement through personalised financial advice. Here are some of them sharing personal finance stories

Call us or book online to secure your consultation today! 



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