Australians are rethinking retirement. With rising life expectancy and market uncertainty, deferred annuities are back in the spotlight as a powerful tool to guarantee future income—now with fresh policy updates for 2025. But how do they work, and are they right for you?
What Is a Deferred Annuity?
A deferred annuity is a long-term investment product that lets you invest money now in exchange for a guaranteed stream of income later—usually starting several years down the track, often at retirement. Unlike immediate annuities, which begin payments straight away, deferred annuities offer a future payout, making them a strategic choice for those planning ahead.
- How it works: You pay a lump sum (or regular contributions) to an insurer. The funds grow tax-deferred until the payout phase begins.
- Payout timing: You choose when to start receiving income—typically aligned with your intended retirement age.
- Options: Fixed or variable returns, inflation-indexed income, and beneficiary arrangements for estate planning.
2025 Policy Changes: What’s New for Deferred Annuities?
This year, the Australian Government updated superannuation and retirement income stream rules, making deferred annuities more attractive for retirees and pre-retirees. Here’s what’s changed:
- Superannuation Integration: As of 1 July 2025, deferred lifetime annuities (DLAs) can be purchased with superannuation funds, enjoying the same concessional tax treatment as account-based pensions.
- Minimum Drawdown Relief Extended: The government has extended minimum drawdown relief for superannuation income streams, allowing greater flexibility in structuring retirement income with deferred annuities.
- Transfer Balance Cap Exemption: Under the 2025 reforms, the portion of a deferred annuity’s value that reflects future income payments may be excluded from your transfer balance cap calculation, freeing up more room in your retirement savings strategy.
- Social Security Means Test Adjustments: The treatment of deferred annuities under the Age Pension means test has been tweaked, with some products now enjoying more favourable assessment for both assets and income tests.
These changes mean Australians can lock in future income, reduce longevity risk, and potentially improve Age Pension eligibility—all while enjoying tax advantages.
When Does a Deferred Annuity Make Sense?
Deferred annuities aren’t for everyone, but for the right investor, they can solve critical retirement planning headaches. Here’s where they shine:
- Longevity risk management: With people living longer, outliving your super is a real concern. A deferred annuity guarantees income, no matter how long you live.
- Tax efficiency: Growth inside a deferred annuity is tax-deferred, and annuities purchased with super funds can provide tax-free income for over-60s.
- Retirement income certainty: Locking in a future income stream at today’s rates provides certainty in a volatile market.
- Estate planning: Many deferred annuities offer death benefit options to support your family or nominated beneficiaries.
Example: Consider John, age 55. He invests $200,000 from his super into a deferred lifetime annuity in 2025, scheduled to start paying out at age 67. The annuity guarantees him $14,000 per year for life, indexed to inflation, regardless of how long he lives or how markets perform. This income is in addition to his Age Pension and other super withdrawals, creating a robust safety net for his later years.
Risks and Considerations
While deferred annuities offer stability, they’re not without trade-offs:
- Liquidity: Once purchased, your funds are locked in. Early access is limited or may incur penalties.
- Inflation risk (for fixed annuities): If you don’t select an inflation-linked option, the real value of your payments could erode over time.
- Provider risk: Your income depends on the financial strength of the insurer, so choose a reputable provider.
- Complexity: Product features, fees, and payout structures vary widely. Compare carefully and understand the fine print.
Recent product innovation means there are now deferred annuities tailored for different retirement goals, including flexible start dates, partial withdrawals, and joint-life options for couples. In 2025, major Australian insurers like Challenger and TAL have expanded their offerings, making it easier to find a product that fits your needs.
How to Compare and Choose a Deferred Annuity
Shopping for a deferred annuity in 2025? Focus on these key factors:
- Payout structure: Fixed vs variable, guaranteed period, inflation indexation
- Fees: Upfront, ongoing, and exit fees
- Provider reputation: Financial strength ratings and customer reviews
- Flexibility: Early access, reversionary beneficiary options
- Tax and Centrelink impacts: How the annuity fits with your overall retirement and social security strategy
Use ASIC’s MoneySmart calculator or speak with a licensed financial professional for tailored projections.
