Annuities, defined-benefit pensions and other income in your FIRE plan

Most FIRE plans model two pots: super and everything else. But a real Australian retirement often has a third layer sitting on top, income that arrives whether markets are up or down. A lifetime annuity. A defined-benefit or military pension. Family Tax Benefit while the kids are still at home. A Carer Payment. Each of these changes the picture in two separate ways at once: how much tax the household pays, and how much Age Pension it qualifies for. Leave them out of the model and the plan is reading the wrong income.

This post covers what counts as “other income” in a FIRE plan, how each type is taxed, how each is means-tested against the Age Pension, and the one lever that only exists for couples: who the income belongs to. It finishes on a worked example, run through the same engine the app uses, where a homeowner couple adds a $20,000-a-year lifetime annuity and watches the pension taper and tax bill move.

What counts as “other income”

ProjectFi treats a supplemental income stream as any recurring, non-portfolio income with a start age and an end age. The four most common in an Australian FIRE plan:

• Lifetime and fixed-term annuities. You hand an insurer a lump sum and receive a guaranteed income for life or for a set term. The income is generally taxable once you are over 60 only to the extent it has a taxable component, and it is assessed by Services Australia under both the income and assets tests.
• Defined-benefit and military pensions. Older public-sector, defence, and some corporate schemes pay a pension based on years of service and final salary rather than an account balance. These are taxable income (often with a tax offset), and the pension payments are assessed under the Age Pension income test.
• Family Tax Benefit (FTB). A payment toward the cost of raising children. It is tax-free and is not counted as income for the Age Pension. In a plan it is a clean offset against spending for the years the children qualify.
• Carer Payment. An income-support payment for someone providing constant care. It is taxable in some cases and tax-free in others depending on the carer's and care receiver's circumstances; check your own situation with Services Australia.

The two axes that matter for the maths are the same for every stream: is it taxable, and is it counted under the Age Pension means test. Those two questions are independent. A stream can be taxable and means-tested (an annuity), tax-free and not means-tested (FTB), or any other combination.

How each stream is taxed

Tax treatment is the first axis. The engine applies it per stream: tax-free streams flow straight through as a pure offset against the household's spending; taxable streams are added to the relevant person's assessable income and taxed at their marginal rate, with the net amount flowing through.

• Annuities (over 60). A super-sourced annuity paid from a taxed fund is generally tax-free from age 60. An annuity bought with ordinary (non-super) money has only its earnings component taxed, with a deductible amount reflecting the return of your own capital. The ATO sets out the treatment for super income streams and lump sums.
• Defined-benefit pensions. Taxable as ordinary income, usually with a 10% tax offset on the taxed element of a capped defined-benefit income stream. Treated as pension and government-payment income by the ATO.
• FTB. Tax-free. It does not appear on a tax return as assessable income.

How each stream is means-tested

The second axis is the Age Pension means test, and this is where generic retirement content most often gets the maths wrong. Services Australia applies two tests, an income test and an assets test, and pays you the lower of the two results. Income streams interact with both.

The income test

Under the income test, a taxable income stream like an annuity or a defined-benefit pension is assessed largely at its face value. That is different from how your financial assets are treated: cash, shares, and super in pension phase are not assessed on their actual income but are deemed to earn a set rate. So $20,000 of annuity income counts as $20,000 of assessed income, while $20,000 drawn from an account-based pension counts only through deeming on the balance behind it. Tax-free welfare payments like FTB are not counted in the income test at all.

The assets test and the lifetime-annuity concession

Under the assets test, the rule for a lifetime income stream is deliberately concessional. For most lifetime annuities purchased from 1 July 2019, Services Australia assesses only 60% of the purchase price as an asset until you reach age 84 (or for a minimum of five years), and 30% from then on. An account-based pension, by contrast, is assessed at its full current balance. That concession is the whole means-test argument for a lifetime annuity: converting an assessable balance into a stream that is only partly counted can lift the Age Pension entitlement, sometimes by more than the income the annuity sacrifices.

The couple angle: who owns the income

For a couple, a taxable stream is not just a household number, it belongs to one person. That matters because Australia taxes individuals, not households. A $20,000 annuity attributed to a partner with no other income is taxed in that partner's hands, where the tax-free threshold and offsets can absorb most or all of it. The same $20,000 attributed to a partner already earning $90,000 is taxed at their marginal rate. The Age Pension income test, by contrast, looks at the couple's combined income either way.

The “Other income” card on the Tracking page exposes this directly: on a taxable stream, the “Whose income” field (primary or partner) decides whose return it lands in. The engine taxes the stream in that person's hands and runs the couple's combined income through the pension test. It is the same per-person tax logic the app uses for non-super investment income, applied to income streams.

Worked example: a couple adds a lifetime annuity

Consider homeowner couple, both 67, already retired and at Age Pension age. They own their home outright (exempt from the assets test), hold $400,000 in super between them and $170,000 in non-super investments, and spend about $60,000 a year. With no other income, the engine puts their combined Age Pension at $40,167 a year.

Now they buy a $20,000-a-year lifetime annuity and attribute it to the lower-income partner. Here is what the engine reports for that year, side by side:

Three things move. The annuity adds $20,000 of gross income. The income test claws back $6,357 of Age Pension, because the annuity counts at face value against the couple's combined income. And the tax on the annuity is $0, because attributing it to the partner with no other income keeps it inside the tax-free threshold and offsets. Net, the household is $13,643 a year better off in spendable income, not the full $20,000 the annuity pays, but well above what a naive “the pension just disappears” rule of thumb would suggest.

Attribute that same annuity to a partner who already has taxable income and the tax line stops being zero, so the net gain shrinks. That is the couple lever in one sentence: the pension drag is a household number, but the tax is a per-person number, and you choose whose name the stream sits under.

The assets-test angle: lifting a zero pension off the floor

The worked example above is income-test territory: that couple already receives a pension, and the annuity income claws some of it back. But the lifetime-annuity concession does its most interesting work at the other end, for an asset-rich household sitting over the assets cutoff at zero pension. Because Services Australia assesses only 60% of an annuity's purchase price under the assets test (until age 84, then 30%), every dollar converted takes 40 cents out of the assessable pool. Convert enough, and an asset-rich couple can drop under the cutoff and qualify for a part pension that did not exist before.

Take a homeowner couple, both 67, with $1,150,000 in assessable assets, about $65,000 over the $1,085,000 couple-homeowner cutoff. They start at $0 pension. The chart traces what happens as they convert savings into a lifetime annuity, from $0 up to $500,000. Assessed assets fall by 40 cents on the dollar, and once they cross under the cutoff at about $162,500 converted, a part pension begins and then rises by roughly $31 a year for every extra $1,000 annuitised.

The honest caveat is built into the chart. The Age Pension is the lower of the assets-test and income-test results, so both lines are plotted, and the shaded line is what the household actually receives. For this couple the income test never binds in this range, their deemed income stays low, so the strategy is purely assets-test driven. For a household closer to the income-test boundary, the annuity payments assessed at 60% could pull the income-test line down to where it caps the benefit, and the shaded “received” line would follow that lower test instead. The strategy helps mainly assets-test-bound retirees.

Modelling your own streams

To model a stream, open the Tracking page and find the “Other income” card. Add an income row, give it a label, and set the annual amount and the start and end ages. Flip the Tax-free / Taxable toggle to match the stream, annuities and defined-benefit pensions are Taxable, while FTB is Tax-free. For a couple, set “Whose income” so the projection taxes it in the right person's hands. The engine then folds each stream into the year-by-year projection: tax-free streams offset spending, taxable streams are taxed in the owner's hands, and taxable streams flow into the Age Pension income test at face value. The retirement income chart shows the result year by year, so you can see exactly where a stream lifts net income and where the pension taper takes some of it back.

This is the same posture as the rest of the app: you choose the streams and their attribution, the engine runs the tax and means-test consequences, and the chart explains what happened. It does not tell you whether to buy an annuity. It shows you what an annuity does to the plan you have described.

Related reading

The means-test mechanics behind this post are covered in depth in how the Age Pension assets test shapes Australian FIRE plans, and the access constraint that decides when super can become an account-based pension in the first place is in preservation age explained. For a household that looks like the worked example above, the regular-FIRE couple case study walks through a full projection. The engine assumptions are documented on the methodology page.

Sources

• Services Australia: Income streams (how annuities and pensions are assessed)
• Services Australia: Income test for pensions
• Services Australia: Income and assets test for pensions
• Services Australia: Income streams (Age Pension), 60% / 30% lifetime-annuity assets-test concession
• Services Australia: Deeming
• Services Australia: Family Tax Benefit
• Services Australia: Carer Payment
• ATO: Withdrawing and using your super (income streams)
• ATO: Government payments and allowances (defined-benefit pension income)