Over recent years some public policymakers have said retirees underspend in retirement. Studies have shown many people still have most of their superannuation and investments when they pass away. They have not run their savings down living well.

In order to get retirees to spend more, the Government is offering increased age pensions for those who invest in annuities. Also, some investment and insurance companies have developed more attractive types of annuities.

The Government is offering forty per cent discount off the purchase price of annuities in the Centrelink Assets Test until age 84. From age 84 on, providing the annuity has been held five years, seventy per cent of the value is disregarded.

This can mean a large boost to many retirees Age Pensions. Also some with assets exceeding the Assets Test cutoff can qualify for a part Age Pension when they otherwise wouldn’t.

Why don’t retirees spend more of their capital? People work hard to save and accumulate assets during their lifetimes. Should they then spend all those savings living lavishly and die with little? One problem with that approach is that people don’t know how long they will live.

It could be anything from a few years to several decades. That’s a very big range and no-one wants to be old and broke due to spending too much early on. So spending only earnings and keeping most capital intact seems sensible. In addition, aged care can require large capital sums.

Most retirees choose account-based pensions. They provide a sound income, earnings dependent on the investments chosen, and usually retention of much of the capital until death.

Lifetime annuities involve a retiree exchanging a lump sum for a guaranteed income for the rest of their life. They have never been popular in Australia.

Some of the new style annuities offer a full refund of the purchase price if the retiree dies before their life expectancy. Partial withdrawals are even possible up until life expectancy.

The annuities still guarantee a minimum income for life even if the retiree lives past 100. Payments can be indexed to the CPI, meaning more income certainty. Knowing this allows people to spend more early in retirement when they are more active.

Some new annuities allow investors to choose their underlying investments. If they earn higher returns, the retiree receives higher income. Some also allow retirees to draw higher incomes in the early years when they are more active.

A retirement plan that includes both annuities and account-based pensions may be best. Professional advice can help decide the ideal solution.