Releasing the latest Intergenerational Report this week, Treasurer Jim Chalmers said retirees were living too frugally because they feared they would run out of superannuation before they die — something called longevity risk.
Super funds would therefore need to come up with better ways to give members the confidence to spend their savings, Chalmers said.
Annuities, which provide guaranteed income over a set period, will be touted as one solution to the problem. But as Chalmers acknowledged, they have not been taken up in Australia with significant enthusiasm.
Alert to the impending retirement wave, many super funds are looking at annuity-
type solutions, but account-based super pensions remain popular.
An annuity guaranteeing that pension scheme members will not outlive their savings and have enough money for medical or old age care can boost spending by about 50 per cent, AMP has found.
That contrasts with many traditional account-based pensions where the fear of outliving savings is a prime cause of more than 90 per cent of scheme members dying with their original balance intact, analysis by the Australian Retirement Fund shows.
But annuities, which are fixed-income products used to provide guaranteed returns, are “kryptonite” for many retirees because of concerns about low returns and the possible impact on estate planning, according to Alex Dunnin, executive director of research and compliance at Rainmaker Information.
Dunnin estimates there is only about $2 billion to $3 billion in annuities in industry funds, which means account-based pensions are about 13 times more popular.
“If annuities are going to bounce back then the sector will need to go back to the drawing board and reimagine itself,” he says.
Work needs to be done
Chalmers has flagged moves to require superannuation funds to work harder to deliver steady income for the millions of Baby Boomers entering retirement.
At a super round table hosted by The Australian Financial Review this week, Chalmers said he would issue a discussion paper in the coming weeks canvassing problems with financial advice, customer service and retirement income strategies after the $3.5 trillion super sector was chided by regulators for failing to understand its customers.
“Half of retirees draw down the minimum and, on average, people who draw down the minimum will still have about a quarter of their super remaining when they pass on,” he said.
How retirees are planning
Mike Valos, 67, a recently retired academic, says he is confident that he will be able to continue drawing down an income from an account-based super fund without any income guarantees.
Valos, a father of Eugene, 20, and Gracey, 23, says: “I’ve always been careful so it’s hard to start splurging in my retirement. I’d be more scared about being bored than running out of money.”
Geoff McClelland, a former IT specialist and self-funded retiree who finished working last year, says guaranteed income products have a place for retirees who want to buy a regular income.
But McClelland, a member of the Australian Shareholders’ Association, says many retirees are put off by their expense, risk of the provider defaulting and ignorance of what they do, how they produce income and what can influence their return.
For example, annuities are like a reverse life insurance policy because they take payments upfront and dole out a lifelong income stream to policyholders until they die.
Many fear if they die younger than expected that they will lose a big chunk of cash that may have been bequeathed as inheritance.
“Most people would prefer to go to a marriage counsellor followed by a dentist than talk about money,” says Anne Fuchs, chief of retirement for Australian Retirement Trust (ART), which has 2.3 million members and $260 billion under management.
The trust is a leader in designing “new generation” products intended to bridge the retirement advice gap.
Hard to find advice
Retirement planning problems are compounded by a crippling shortage of financial advisers and most retirees not having a clue about how much it will cost to fund their retirement lifestyle, despite online guides from the Australian Securities and Investments Commission and the Association of Superannuation Funds of Australia, which represents retirement funds with more than $3 trillion under management.
Fuchs says: “Retirement is an individual experience and planning will depend on a range of factors including accumulated savings, homeownership, whether they have a partner and what they want.”
Ian Fryer, general manager of consultancy Chant West, adds: “There also needs to be guidance, tools and advice around these retirement products otherwise very few people will take them up.”
Olivia Maragna, co-founder of Aspire Retire Financial Services, which typically advises wealthy clients, says most of her clients prefer account-based super because they want to control their money, rather than have it tied up in an annuity.
Maranga says: “They want flexibility. When you set and forget with a fixed income product you also lose flexibility and control, particularly if circumstances change.”
Rainmaker’s Dunnin adds: “Super members vastly prefer account-based pensions, no doubt because they are easier to understand, are much more flexible, have more investment choice and since they are market-linked, would likely pay better pension benefits.”
But Wayne Strandquist, president of the Association of Independent Retirees, which represents retirees who are fully, or part-funded, says the case for steady income strengthens as retirees grow older.
Addressing retirees’ biggest fears
Fund providers, such as AMP, are responding with hybrid products that combine the range of investment options available for an account-based scheme with lifetime cash flow features based on annuities to overcome the fear of running out of money.
These products are also typically designed to combine with the age pension, including providing discounts on the Centrelink assets test.
Ben Hillier, AMP’s general manager of retirement solutions, says members of its MyNorth Lifetime product have increased their spending of retirement income during retirement by 50 per cent.
“It is staggering,” Hillier says of the turnaround.
Aaron Minney, head of retirement income research for Challenger, the nation’s largest provider of annuities, says there is a wide range of annuities to choose from including lifetime, term indexed or reversionary, where the benefit reverts to a spouse upon death.
“It’s a defensive asset,” Minney says. “You are securing an income stream to make sure you have the income you need for as long as you need it,” he says. Rising cash and interest rates are also improving annuity returns, according to specialists.
“To deliver the best outcome for members, funds need to know more about them than simply investing members’ contributions. Progress is being made: recent activity from certain super funds shows they are keen to understand their members better,” he says.
Rising cash and interest rates are also improving annuity returns, according to specialists.
ART’s Fuch says super members coming up to retirement need to get financial advice to review their personal situation, discuss possible changes to their investment strategy and consider future spending requirements.
“If you don’t have a financial adviser then talk to your super fund,” she says. “It is a complicated issue and retirees need advice about how to produce an income stream and how that potentially interfaces with pension payments and benefits.”