A Level Payment Starts Higher and Ends Smaller
Lifetime annuities are quoted two ways: a level payment that never changes, and an indexed payment that rises with inflation each year. The indexed version starts materially lower — often 25 to 35% lower — and overtakes the level one after roughly a decade. Which is better depends on how long you live and what inflation does.
- The answer: Indexed payments start lower and cross above level payments after roughly ten to fifteen years, depending on the indexation rate.
- The trap: Cumulative totals cross much later than annual payments do — usually well past twenty years — because the level option banks a lead early.
- The recommendation: The question an annuity answers is very old age, so the indexed shape usually matches the purpose better than the level one.
Where the AI summary above gets this wrong
"Take the higher annuity payment."
That's surface-true. Here's what it misses:
- The higher payment is the one that erodes — A level payment loses roughly a third of its purchasing power over twenty years at moderate inflation, at exactly the age when care costs rise.
- Two different crossovers exist — The annual payment crosses after around a decade; cumulative totals take far longer, and confusing the two changes which option looks better.
01 What the two shapes do
A level annuity pays the same nominal amount for life. A CPI-indexed annuity adjusts each year with inflation, so it holds purchasing power rather than dollars constant.
Because the insurer is taking the inflation risk in the indexed version, the starting payment is lower — commonly 25 to 35% lower for the same purchase price at current pricing.
Some products offer partial indexation at a fixed percentage instead, which sits between the two and removes the uncertainty for both sides at a cost in the starting amount.
Whichever shape is chosen, the underlying product is the same trade: capital exchanged for a payment that cannot run out — the case for it is in the annuity comparison.
Source: ASIC Moneysmart — Annuities
02 Where the two lines cross
At 3% indexation, an indexed payment starting 30% below a level one catches it in roughly twelve years. At 2% it takes around eighteen; at 4% about nine.
That is the annual payment crossing. Cumulative totals cross much later, because the level option has been ahead for the whole period up to the annual crossover and has banked that lead.
For a purchase at 65, the annual crossover falls in the mid to late seventies and the cumulative one somewhere past ninety. Which matters depends on whether you are protecting current spending or late-life spending.
Shows: the year an indexed payment overtakes a level one, and what each pays at a chosen future age. Ignores: the means test, mortality, tax on the payments, and any guarantee or withdrawal period.
03 Which fits the purpose
The reason to buy a lifetime annuity is the risk of living a very long time. That risk lives in the years past 85, and those are precisely the years where a level payment has lost the most purchasing power.
The means test treats both shapes the same way under the current lifetime income stream rules, so the choice is not distorted by the Age Pension — the assessment rules are in the means test post.
If the annuity is instead covering a fixed period or a specific cost that does not inflate, the level shape is the coherent choice, and it costs less to buy the same nominal amount.
Source: ASIC Moneysmart — Annuities
People take the level payment because the number is bigger and the number is now. The whole reason to buy a lifetime annuity is the possibility of being 95, and a level payment at 95 is worth about half what it was at 65. The shape should match the purpose.
FAQ
Should I take an indexed or level annuity?
Indexed suits the purpose most people buy an annuity for, which is very long life. Level suits a fixed-period need or a cost that does not inflate.
When does the indexed payment overtake the level one?
At 3% indexation and a 30% lower starting payment, in roughly twelve years. Cumulative totals take far longer to cross, usually past twenty-five years.
Does the Age Pension treat them differently?
No. Both are assessed under the same lifetime income stream rules, so the means test does not favour one payment shape over the other.
Sources
Regulator references
- ASIC Moneysmart — Annuities · ASIC Moneysmart · 2026Annuities: what they guarantee and what they give up.Last verified: 2026-09-07
- Reserve Bank of Australia — Inflation · Reserve Bank of Australia · 2026The Reserve Bank's inflation data and its target band.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.