Could annuities solve our retirement woes?

The Grattan Institute has dropped a report this week that’s got everyone talking. It tackles a familiar issue: Australians are nervous about spending their retirement savings.

Most retirees live off the income their super generates, leaving the capital untouched to pass on as a legacy. The problem? Many are living far below the standard they could comfortably afford, simply because they’re too cautious to dip into their savings. And the real purpose of superannuation – to fund our retirements is being neglected.

The report also points out what we’ve all been saying for years: the superannuation system is far too complex, and there’s virtually no support to help people figure out how to navigate retirement once they stop working.

A new report has suggested that a little known and oft misunderstood financial product might be the magic retirement formula we need.Credit: afr

The proposed solution? The Grattan Institute suggests the government step in and start offering lifetime annuities – products that already exist that are designed to provide retirees with a secure, steady income stream for life.

It’s a bold suggestion, and for me, it raised some big questions about whether lifetime annuities could be the key to giving Australians the confidence to spend their super and live more comfortably. Whether it’s the shake-up we need or just another idea that will spark a lot of debate, one thing is clear: the way we think about funding our retirement needs to change.There are three big lessons we can take from this report.

Are lifetime annuities a good tool for helping people spend more in retirement?

Modern lifetime annuities are a far cry from the old-school, rigid products many people still associate with the term. Today’s annuities are designed to provide a guaranteed income stream for life in exchange for an upfront investment of your capital – offering retirees a sense of financial security.

Here’s how it works: if you purchase a lifetime annuity, you’re locking in an income stream that continues, no matter how long you live. If you reach the average life expectancy of around 88, you’re covered. But if you live to 94 – or beyond – you’ll still receive your inflation-linked income.

The best part? If you die earlier than expected, most modern annuities include a death benefit, ensuring your loved ones can inherit part of the remaining value.

Unlike the outdated perception that annuities mean your money “disappears forever”, today’s lifetime annuities offer much more flexibility.

Many are market-linked, allowing you to select an investment strategy that matches your comfort level – whether you prefer a more aggressive or conservative approach. These products often include annual bonuses tied to investment performance, adding upside potential while eliminating downside risk.

We need to make annuities more transparent, appealing and accessible while ensuring they’re easier to understand.

What’s more, annuities can also be a strategic tool for maximising pension entitlements. Some modern annuities are structured to provide a 40 per cent discount under the assets test, helping retirees access or improve their pension benefits while securing a steady income stream for life.

But the real value of a lifetime annuity lies in its predictability and security. You don’t have to worry about running out of money, and you can plan your expenses knowing a portion of your income is locked in, inflation-proofed and guaranteed for life.

However, the biggest hurdle for lifetime annuities isn’t how they work: it’s trust. Many Australians are hesitant to commit their savings to a product they don’t understand well at all. The confusion around annuities often stems from outdated ideas and poor education about the flexibility and benefits these products can offer.

If more Australians understood the modern features of lifetime annuities – like death benefits, market-linked options, age pension access and inflation protection – they might view them as a valuable tool for retirement planning.

It’s clear that better education and greater transparency are needed to build confidence and help retirees consider how annuities could fit into their overall strategy for a secure and fulfilling retirement.

Can private providers and super funds handle this?

Private providers and super funds already offer lifetime annuities, but uptake remains frustratingly low. Why? It’s not necessarily because annuities aren’t useful – it’s because the current system doesn’t make them easy to access or attractive to retirees.

Private financial advisers are currently the main gatekeepers for these products, but their recommendations can still be influenced by subtle biases. Since commissions were removed, there’s less direct conflict of interest, but many advisers still favour active investment strategies or managed funds over simpler options like annuities.

Confusion about how annuities work has hindered their growth.Credit: Simon Letch

This is often because they see active strategies as offering better long-term results or fitting better with their way of managing portfolios. Moreover, only a handful of super funds offer lifetime annuities, and their adoption has been held back by restrictive laws and inefficiencies in the system.

That landscape is set to change in 2025. New legislation will give super funds greater ability to provide tailored financial advice and incorporate retirement income products like lifetime annuities more seamlessly.

And some of the larger funds in Australia such as AustralianSuper, UniSuper, ART and AMP are stepping up. This means retirees will be able to purchase lifetime annuities directly through their super funds, avoiding the need for external financial advisers altogether.

Super funds will also be better equipped to offer annuities with simpler features and at competitive prices, leveraging their scale and in-house expertise. And, over time you should expect lifetime annuities to become seamlessly integrated into super.

Imagine a world where your super fund manages your accumulation phase and integrates lifetime annuities into your retirement plan automatically. You’d no longer need to shop around or navigate confusing advice channels. Your fund could offer a seamless transition into retirement with predictable income streams that are easy to understand and access.

This integration could be a game-changer for consumers and funds. If super funds take on a more proactive role in educating their members and marketing lifetime annuities as part of a holistic retirement strategy, the uptake could soar without the need for government intervention.

That said, there’s still a strong case for government involvement – in a supportive role. A government-backed annuity program could help build trust by guaranteeing the income stream and enabling funds to offer these products at lower costs through economies of scale.

Many people feel more confident trusting the government with their retirement security than private providers, which could make government-supported annuities especially appealing.

Whether it’s the private sector stepping up or the government taking the lead, one thing is certain: the path forward must be simpler, more transparent, and focused on what’s best for retirees.

Should purchasing an annuity be mandatory?

The Grattan report suggests retirees should be “encouraged” to use 80 per cent of their super balance above $250,000 to purchase an annuity. The report does not suggest making annuities mandatory, which, I think, is the right call.

While mandatory annuities would be a game-changer, they come with serious trade-offs. Forcing people to lock away the majority of their savings removes personal choice, and not everyone’s retirement goals align with a fixed income stream. Retirement is deeply personal, and for many, the idea of giving up control over such a significant portion of their nest egg is unpalatable.

On the other hand, making annuities optional hasn’t exactly been a success. Uptake has been minimal, even though annuities offer real advantages. Too many people avoid them, often to their own detriment because they don’t understand how they work – or they don’t trust the system.

Perhaps the answer lies in the middle ground. What if the system defaulted to offering annuities, with retirees required to actively opt out if they prefer another strategy?

Default options have been proven to work in other areas, like automatic enrolment in superannuation itself, and could nudge more retirees towards the security of a guaranteed income stream. At the same time, it preserves choice for those who have other plans.

What’s clear is that Australians need better tools and education to navigate the retirement phase, and the Grattan Institute’s report raises an important conversation.

A government-backed annuity program could help build trust.Credit: Alex Ellinghausen

Annuities – whether offered by the government, super funds, or private providers – have a role to play in helping retirees spend their savings with confidence, free from the fear of running out.

The real takeaway? We need to make annuities more transparent, appealing and accessible while ensuring they’re easier to understand.

Retirees would naturally choose to allocate a portion of their savings to annuities because they recognise the value – and trust the system to help them achieve an epic retirement.

Bec Wilson is author of the bestseller How to Have an Epic Retirement. She writes a weekly newsletter at epicretirement.net and is host of the Prime Time podcast.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making financial decisions.

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