The Government proposes to adopt the Financial System Inquiry’s primary objective of superannuation which is “to provide income in retirement to substitute or supplement the Age Pension.’
While we agree with the sentiment, it has been misinterpreted by several uninformed commentators. The persistent myth concerning superannuation lump sums makes it more difficult to have meaningful discussions about Australia’s retirement incomes system in the lead-up to the federal Budget.
The myth is that Australians have a strong preference for taking their superannuation upon retirement as a lump sum rather than a pension. An underlying message accompanying this myth is that many of these retirees will then rapidly spend their super money and fall back on a full Age Pension.
This makes for some heated debates and attention-grabbling headlines. Yet in reality, the opposite is true.
Research by Rice Warner shows that 83% of the value of all superannuation retirement benefits in 2013-14 were invested in superannuation pensions. Only 10% of retirement assets were taken as a full lump sum while the remainder was taken as a partial lump sum.
Significantly, at least a third of the lump sum payments were reinvested – such as in bank deposits – while much of the rest was used to reduce debt, both of which are forms of saving.
It is hardly surprisingly that the bigger the super balance, the more likely a retiree is to favour a pension. Again in 2013-14, almost 87% of superannuation accounts (excluding SMSFs) with balances of more than $300,000 at retirement were taken as pensions – against 28% of accounts with balances of $50,000 or less.
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