Will government annuities take stress out of super?
A government alternative to private superannuation, guaranteeing a lifetime income to retirees, has its pros and cons.
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A prominent think-tank has recommended the Australian Government establish an annuity, which would provide a guaranteed income to retirees.
The Grattan Institute outlines this proposal in a report noting that around 80% of Australians find retirement planning complicated and about 60% expect their retirement will be financially stressful.
“Few retirees draw down on their retirement savings as intended, and many are net savers – their super balance continues to grow for decades after they retire,” the Institute says. “This is turning Australia’s multi-trillion-dollar compulsory superannuation system into a massive inheritance scheme.
“That 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.”
While such claims ignore the fact that many older people do not have adequate superannuation in retirement, the institutes recommendation that the Federal Government offer all Australians an annuity that would pay them a guaranteed income for life could be attractive to some retirees.
It says retirees should be encouraged to allocate 80% of their super balance above $250,000 to the government annuity, and that this reform could boost retirees’ incomes by up to 25%.
The Institute also recommends that:
- The government create a Top 10 list of the best super funds, and steer retirees towards those funds. It should ask the Australian Prudential Regulation Authority (APRA) to assess and performance-test all account-based pensions. The Insitute says this could boost the incomes of future retirees who continue to opt for an account-based pension by up to $70,000 over their retirement.
- The government establish a free, high-quality financial guidance service for retirees and people approaching retirement. The service would also assist eligible retirees to apply for the Age Pension. Grattan says this service would cost about $360 million over its first four years and should be funded by a levy on all super account balances.
Keep reading to hear what we think!
National Seniors Australia (NSA) supports making super simpler and easier. We are not opposed to an annuity system, but we believe seniors must have the choice of how they manage and use their superannuation.
As we noted in a submission to Treasury last year, “NSA believes strongly there is scope for an independent guidance service to complement information provided by funds and advice given by financial advisors.“Ideally, this service should not be delivered by government or government agencies but via an independent community-based organisation with a clear mandate and responsibilities and adequate funding.
“This could operate similar to the UK Pension Wise program, giving superannuants access to free or subsidised information sessions and could be funded via a combination of government funding, industry levy, and co-contributions.
“This model would support competition in the superannuation sector and reduce the risk of conflicts of interest. It could become a one-stop shop for information about financial wellbeing in later life, including information related health and aged care.”
NSA chief executive officer, Chris Grice, called this week for a “blended form of advice” for seniors, combing online calculators and in-person assistance.
He told SBS that many people had concerns about cyber security and sharing their financial information online. He said it was “incredibly important” that retirees have access to advice they can trust.
Studies reveal seniors’ concerns
NSA has conducted extensive research into the concerns of older Australians as the approach and enter retirement.
In 2018, our research team released a report, Once bitten twice shy: GFC concerns linger for Australian seniors, which revealed concerns about a repeat of the market turmoil of the Global Financial Crisis.
In 2020, another report, Retirement income worry: Who worries and why?, built on research showing that having sufficient income ranked second only to climate change among the concerns of the people surveyed.
While NSA supports the establishment of a government-backed annuity system, it should not be compulsory.
Our position is informed by research outlined in our 2020 report, Retirement income worry: Who worries and why?.
According to the report, “The least worried [about their financial future] are those who have a defined benefit pension or a lifetime annuity, the majority of whom are unconcerned about outliving their savings.
“Having a source of income that will last for life will be a key factor behind the lack of worry.”
The following graph from the report reflects Worry according to main source of income in retirement.
NSA research conducted in the wake of the Global Financial Crisis (GFC), Once bitten, twice shy: GFC concerns linger for older Australians, reinforces likely support for annuities.
It showed that older people remained wary of market turmoil almost 10 years after the GFC, were wary of the impact of future crises and rated having an income that lasts a lifetime as one of the most important goals.
Access to a government annuity, as proposed to Grattan, may help ease concerns about exposing superannuation to private schemes.
In contrast to the Grattan Institute, NSA’s position is that superannuation isn’t just about regular income; retirees also need access to capital.
They want the flexibility to choose to take a lump sum for a specific purpose, be it home maintenance, a family emergency, a holiday, or some other reason.
In our submission to the Senate Standing Committee on Economics regarding the Superannuation (Objective) Bill, we said, “Many people draw on super earlier in life for good reason.
“The superannuation objective should be flexible enough to accommodate this. For example, some people need to access their superannuation before they reach preservation age in situations of ill health.”
NSA research has also shown that people want to hold on to their savings for health reasons and because of uncertainty about markets. This sentiment is likely to grow stronger as a result of moves to increase consumer contributions to aged care and in response to fears about rising out-of-pocket health costs.
Mr Grice notes “In a perfect world where there is universal access to quality health and aged care, retirees would be less likely to worry and less concerned with holding surplus capital. That isn’t the reality, so its understandable and even rational for older people to hold onto some capital for future unknowns.”
Related reading: Grattan Institute, SBS
