What is an investment-linked lifetime income stream?

A ‘lifetime’ income stream (LIS) is one of the simplest retirement products to understand at a high level. In exchange for a lump sum, it pays you a regular income for the rest of your life, no matter how long you live. In effect, it converts part of your retirement savings to an income stream that you can never outlive.

The primary purpose of a LIS is to eliminate the risk of running out of superannuation income in retirement.

Most LISs also pay out a lump sum if you die earlier than expected. This helps protect your capital if you only receive the income for a short period of time.

Investment-linked lifetime income streams are a type of LIS that are becoming an increasingly important part of Australia’s retirement landscape, with a growing number of providers launching innovative designs.

With an investment-linked LIS, your income payments continue for life, but the amount paid varies over time based on the performance of your chosen investment option(s). The Australian Government also refers to them as ‘Innovative Retirement Income Streams’ or IRIS.

In simple terms, these products sit somewhere between an account-based pension and a fully guaranteed lifetime annuity. Like the guaranteed annuity, investment-linked LISs provide longevity protection to ensure you never run out of income. Like an account-based pension, they can provide exposure to growth assets, which can be important given retirement typically lasts between two and four decades.

An investment-linked LIS provides an opportunity to benefit from long-term market returns, while having lifetime protection by way of insurance or pooling.

Why are LISs being encouraged?

Modelling by the Australian Government Actuary (AGA) showed that retirement income can be 15–30% higher by combining retirement products, particularly by allocating some money to a LIS.

This is consistent with international research and Australia’s retirement policy framework. The OECD recommendations, the Retirement Incomes Review, the Retirement Incomes Covenant and, more recently, Treasury’s ‘Best Practice Principles for superannuation retirement income solutions’ all recognise the need for LISs to maximise many people’s retirement income.

Behavioural research by retirement income researchers David Blanchett and Michael Finke of The American College of Financial Services provides another explanation for the benefits through a behavioural lens. Their research suggests that converting part of a retiree’s savings into a LIS provides a valuable ‘licence to spend’. They found that “retirees spend far more from lifetime income than other categories of wealth”.

The underlying challenge if you don’t have a LIS is simple: nobody knows how long they are going to live.

If you invest your super in an account-based pension, you can’t know for certain how much to draw each year without running out.

Withdraw too much and you risk running out of money later in life. Withdraw too little and you unnecessarily sacrifice your living standard in retirement. LIS products solve this dilemma.

Chart 1 shows the actual age at death for Australians aged 65 or more who died in 2023. Each individual retiree simply can’t tell how long their retirement is going to last. It could be one year or it could be over 40 years.

Chart 1: Actual age of death for all Australians who died during 2023 aged 65 or more

A growing body of research indicates that Australian retirees have had a ‘fear to consume’ caused by a ‘fear of running out’. Many retirees respond by withdrawing only the minimum each year, which usually means a relatively large balance gets left unused – so the retiree could have had a higher income.