Australian retirees aren’t drawing down on their superannuation like they should be, says a new report. Photo: File.
Superannuation in Australia is becoming a “massive inheritance scheme” because too many retirees don’t draw down on their savings for fear of outliving their money.
The Grattan Institute has called on the Federal Government to step in and change the system to introduce a lifetime annuity giving retirees a fixed monthly income for life from their invested super savings.
In a report released Sunday night (19 January), the think tank found the superannuation system wasn’t working as intended because it was too complex.
Retirees find the system stressful and are not confident to spend it as they should.
The report, Simpler super: Taking the stress out of retirement, shows that about 80 per cent of Australians find retirement planning complicated and about 60 per cent expect their retirement will be financially stressful.
Retirees are ‘net savers’ and allow their super balances to continue growing for decades after they retire.
What little guidance Australians are offered about spending their superannuation is unhelpful. Yet, how they use their super in retirement is one of the biggest decisions Australians will ever make, the report states.
More than four in five retirees are steered into account-based pensions, which require retirees to manage their spending to try to avoid the risk of outliving their savings.
Half of those using an account-based pension draw their super at legislated minimum rates, which leave 65 per cent of super balances unspent by average life expectancy.
“This is turning Australia’s multi-trillion-dollar compulsory superannuation system into a massive inheritance scheme,” the Grattan Institute’s Brendan Coates said.
“This is not how it was meant to be. Too few retirees are enjoying the benefits of the savings they built up during their working lives.
“The Grattan Institute blueprint for better old age in Australia would let retirees stress less, spend more, and truly enjoy their retirement years.”
The report recommends a three-pronged reform strategy to simplify super in retirement.
Firstly, the Federal Government should offer all Australians a lifetime annuity, which would pay them a guaranteed income for life.
Retirees should be encouraged to allocate 80 per cent of their super balance above $250,000 to the government annuity.
This reform could boost retirees’ incomes by up to 25 per cent, the institute’s report states.
Secondly, the government should create a top 10 list of the best super funds, and then steer retirees towards those funds.
The Grattan Institute says the government should ask the Australian Prudential Regulation Authority (APRA) to assess and performance-test all account-based pensions.
These reforms could boost the incomes of future retirees who continue to opt for an account-based pension by up to $70,000 over their retirement.
And thirdly, the government should establish a free, high-quality guidance service to help retirees, and people approaching retirement, to plan their retirement incomes.
The service should also assist eligible retirees to apply for the age pension.
The report’s modelling says such a service would cost about $360 million over its first four years and should be funded by a levy on all super account balances.
“For most Australians, retirement represents a big life change. Instead of being paid a wage, retirees must draw an income from their savings, together with the age pension,” the report states.
“They must do this while managing the uncertainty of how long they will live and how their investments might perform, as well as navigating the complex interactions of their savings with the means-tested age pension.
“And they have to try to get value for money from their super fund. This puzzle is too hard for retirees to solve alone.
“Many other countries automatically offer retirees an income that lasts the rest of their lives, but Australian retirees get little guidance about how to use their super.
“While we’re working, key decisions about our super are typically made for us – such as how much to contribute and how those savings are invested. But once we retire, the super system casts us adrift.”
The institute calls on the Federal Government to offer retirees a suite of annuities called ‘Lifetime Super’.
This should include a simple lifetime annuity as the baseline offering, as well as alternatives such as investment-linked annuities.
“These annuities should be priced at fair and sustainable rates and managed by an independent agency,” its report states.
“A government option would boost take-up, leverage economies of scale, and could be designed to better integrate with the age pension.”
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