With Australians living longer, there is growing pressure to ensure superannuation can provide an income stream for the whole of life.
The accumulation phase of Australia’s retirement savings system is well regarded around the world. The three pillars of the aged pension, the superannuation guarantee and voluntary super contributions stand Australians in good stead once they finish work for the last time.
But demographic changes mean a re-think is necessary about how we approach retirement incomes.
This was the subject of a series of addresses given by Michael Davison, senior policy adviser – superannuation for CPA Australia, at CPA Congress 2014, held around Australia.
“We’re good at accumulating retirement savings, but we need to do more work on the retirement income phase. We save well, but we don’t spend well. The big issue is how we make retirement savings last,” argues Davison.
He makes the point that many of the tenets of the current system were put in place when life was very different.
For instance, when 65 was set as the age at which a worker could receive the age pension, life expectancy was only 55.
“Now, people are retiring in their 60s and living well into their 80s or beyond. We now expect our super to last 20 years or more. So we need to re-think how retirement savings can adequately cover living expenses and aged care,” he says.
One of the main issues that need to be addressed is the propensity for retirees to take their super as a lump sum.
“Traditionally people receive a lump sum and pay off the house, or buy their last car. But we need to think look at how it can provide a private income stream in retirement,” Davison says. This would help stretch out the amount people have to live on when they retire.
One potential solution to the retirement income conundrum, says Davison, is more flexibility around the rules about drawdowns from super funds when they are in the de-accumulation phase.
At the moment, people who are in their sixties who are retired are required to draw down a minimum of four per cent of their super balance each year. This rises to up to 11 per cent when someone is in their nineties. A re-think of these rules could also help people to make their superannuation last longer.
“We save well, but we don’t spend well. The big issue is how we make retirement savings last.” – Michael Davison, CPA Australia
“The ideas is to protect against longevity risk by deferring some income in retirement,” he adds, pointing out that in the past, tax was payable on lump sum payments. But now there is no benefit to either taking super as a lump sum or drawing down a pension from the balance.
“We need to persuade people to see their super as the source of an income stream in retirement, to help them stretch it out,” he says.
Another way to help people make the most of their super in retirement would be to encourage people to set up a deferred lifetime annuity, to commence later in life, for instance when someone reaches the age of 75 or 80.
In more recent times, people have shied away from annuities given that in the event the annuity holder dies before the money in the fund is exhausted, the remaining funds are not returned to the holder’s beneficiaries. So people have chosen other retirement products to avoid this situation.
Yet another issue that needs to be resolved is the problem of investment risk reducing the super balance of someone who is near retirement. This was a particular problem for people who were nearing retirement as the global financial crisis of 2007-08 hit. Many saw their super balances greatly reduce, and had few options to build it back up, save for prolonging their time in the workforce. But even doing this could not completely help them recover the value of funds lost during the GFC.
Given this is a complex issue, a number of initiatives need to be put in place to resolve it. Davison points to an alternative system that operates in Denmark that could provide a reference point for the architects of the modern Australian super system.
In the Danish system, individuals and the government contribute to a central pool of retirement funds, and everyone receives a pension for life.
But most importantly, to help prolong retirement savings, Davison says we need to move away from a culture in which individuals are encouraged to take their pension as a lump sum.
“Superannuation is not about receiving a lump sum; it’s about receiving an income in retirement.”
In addition, the federal government needs to consider how it could change the rules to allow for more flexible pension products. This includes tweaking the rules so the income on the assets supporting all income streams individuals receive when they retire, including deferred annuities, are free of tax.
Other options include restricting access to lump sums, and also re-thinking the age at which people can access their super and the pension.
“Although the age people can receive the pension has recently been lifted, when it was set at 65, life expectancy was much lower. We need to consider whether we should be lifting the access age for both super and the pension even higher,” Davison says.
This article is from the December 2014 issue of INTHEBLACK
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