The stock was down as much as 13 per cent on Friday after it flagged a fall in earnings, after the Department of Social Services (DSS) changed its mind about assessing income of elderly annuity holders. Its shares closed down 6.4 per cent at $6.35.

The backflip by the DSS regarding its means test assessment of Challenger's Care Annuity product, which would result in an estimated $10 million hit to its bottom line, has prompted a potential legal battle with the department.

The reversal could affect Challenger's elderly Care Annuity holders, whose age pensions could be reduced at the same time the DSS forced them to pay higher daily aged-care fees.

A Challenger spokesman said the impact on the calculation of social security benefits was "highly technical".

The DSS said the annuities had been incorrectly assessed in the past, resulting in incorrect social security payments, Challenger said in its statement.

"The Care Annuity is central to the security and quality of life of many aged-care residents," chief executive Brian Benari said.

"The department's unfair backflip targets some of our most vulnerable elderly and we will be taking action to protect them."

It has suspended sales of its Care Annuity product.

The company said it was difficult to predict the impact of the decision on the Life division's net growth book and therefore could not confirm guidance on its growth. It did, however, lower guidance for the Life division's cash operating guidance by $10 million to $525 million.

In the year ended June 30, associated Care Annuity sales totalled $279 million, equating to about 5 per cent of the Life book, the company said.

Challenger raised $530 million of capital in August to fund growth in its life insurance division through the placement of shares and the issue of hybrid securities.