Tax-Sheltered Annuities in Australia: 2025 Guide & Policy Updates

As Australians navigate an evolving financial landscape in 2025, the search for robust, tax-efficient retirement vehicles has never been more pressing. While superannuation remains the backbone of most retirement plans, tax-sheltered annuities are garnering renewed interest—especially in light of recent regulatory tweaks and the growing demand for income certainty in retirement.

What Are Tax-Sheltered Annuities and How Do They Work?

A tax-sheltered annuity (TSA) is an investment contract—typically with an insurance company—that allows you to accumulate funds on a tax-deferred basis. While TSAs are more prevalent in the US, a growing number of Australian providers are offering similar products that align with local rules, particularly in the context of post-retirement income streams.

Here’s how the typical Australian tax-sheltered annuity functions in 2025:

• Contribution Phase: You invest a lump sum or make regular contributions. The money grows tax-deferred within the annuity.
• Accumulation: Earnings are reinvested and not taxed until withdrawal, enabling compounding growth.
• Payout Phase: At a chosen age (often post-retirement), the annuity pays you a regular income. Tax is only paid on the earnings portion of each payment.

With the 2025 update to the Retirement Income Covenant, Australian providers are now required to offer products that help retirees manage longevity risk. This shift has seen a fresh wave of TSA-style products tailored for Australians seeking stable, tax-optimised income streams beyond superannuation.

2025 Regulatory Changes: What Investors Need to Know

This year, the Australian Taxation Office (ATO) and Australian Prudential Regulation Authority (APRA) have clarified the tax treatment of annuities outside superannuation:

• Tax Deferral: Accumulated earnings within an annuity are not taxed until withdrawn, similar to the tax-deferred environment inside super.
• Means Testing: The 2025 Centrelink Age Pension means test now considers only the income stream from annuities, not the full capital value, providing some retirees with more flexibility.
• Minimum Standards: New rules require providers to disclose break fees, indexation options, and the proportion of payments that are return of capital versus earnings—offering investors greater transparency.

For example, a 62-year-old investor who purchases a $300,000 fixed-term annuity in 2025 will see their annual payments taxed only on the earnings component, with the return of capital portion exempt. This structure can lead to a lower effective tax rate in retirement, especially for investors who have already maximised their super contributions.

Tax-Sheltered Annuities vs. Superannuation: Complement or Competitor?

Superannuation remains the most tax-advantaged retirement structure for most Australians. However, TSAs can play a complementary role, particularly for those who:

• Have reached their concessional and non-concessional super contribution caps
• Desire greater certainty of income, especially as markets remain volatile in 2025
• Need to structure income for Age Pension eligibility

Consider this scenario: After selling a business, Jane, age 59, has already maxed out her super caps for the year. She invests $200,000 in a tax-sheltered annuity, deferring tax on the earnings until she starts drawing an income at age 65. This not only spreads her tax liability but also provides her with a guaranteed income stream, which can be particularly attractive in a low-interest environment.

It’s also worth noting that recent product innovation in 2025 has seen annuities with inflation-linked payments, partial liquidity, and even legacy planning options that allow for structured bequests.

Weighing the Pros and Cons in 2025

• Pros: Tax deferral, guaranteed income, Centrelink flexibility, and diversified retirement income.
• Cons: Lower potential returns versus growth assets, limited liquidity, and the need to understand product fees.

Tax-sheltered annuities are not for everyone, but for Australians who’ve maxed out their super or want another layer of income security, they’re worth a second look—especially as product features and tax treatments continue to evolve in 2025.