The challenge facing superannuation funds in providing meaningful guidance to members as they retire is immense.
It’s not helped by the complexity of the rules that govern retirement, nor by the fact that there increasingly seems to be no such thing as a typical retirement.
Research consistently shows that many people do not retire at the exact time of their choosing. We might imagine we can pick a date sometime in the future, work merrily away until that day, enjoy an absolute belter of a work farewell party, and then ride into then retirement sunset. But we should be so lucky.
CoreData’s Best Possible Retirement research, for example, consistently shows that things like retrenchment, ill-health and having to leave the workforce to care for a loved one are quite common spanners in the retirement works. So, if a reasonable proportion of us can’t even choose the timing of our retirement, it’s anyone’s guess how a super fund is meant to help each of its hundreds of thousands or even millions of members plan or prepare for the day they retire.
Financial advice or guidance has a significant role to play in making retirement better for more Australians. It’s likely to be an integral part of many super funds’ responses to their Retirement Income Covenant obligations and it could be a valuable component.
Recently, SMSF administrator Class published research showing that only half of all APRA-regulated fund members aged over 65 have taken advantage of rules that allow them to move into a tax-exempt retirement income product. This proportion compares unfavourably to the almost seven out of every eight SMSF members (who are also the trustees of their funds).
Shifting money from an accumulation fund to an account-based pension is a strategy available to fund members, whether they’re in an SMSF or an APRA-regulated fund, provided they meet certain qualifying criteria and, critically, provided they know they can do it.
Similarly, a strategy known as Transition to Retirement (TTR) is available to members who meet qualifying criteria, and it has a number of benefits for those that can use it. It allows someone who’s still working to set up an account-based pension, continue to receive employer contributions to their super and also potentially reinvest pension income as voluntary contributions, thus turbo-charging their account balance.
Whether or not you think it represents good use of tax concessions, those are the rules and every Australian is entitled to use the rules to their best advantage.
Details of the strategy aside, the issue is that most Australians are either unaware of the rules or are not being advised on how to best use them, and the Class research suggests those most in the dark tend to be members of APRA-regulated funds.
TTR strategies are financial advisers’ bread and butter. That’s fine for SMSF members, who are more likely than members of APRA-regulated funds to be professionally advised.
ASIC’s Money Smart website contains some basic TTR information and a few things to look out for – leave some money in an accumulation fund so you can continue to receive contributions, keep an eye on your transfer balance cap, and so on – and a general warning along the lines that if you start to draw down on your super account before you actually retire, you’ll have less money when you do actually do retire. But that’s not advice.
An unadvised super fund member must know the strategy is even available in the first place, will need to be guided through how to set it up, and will need to know where to go to get that guidance or advice. Even if they know to ask for it, it’s not certain their fund can currently give them that advice.
It’s not surprising that confidence in the superannuation system to deliver what members expect in retirement isn’t as great as it could be, and why there’s mounting pressure on APRA-fund trustees to offer better retirement services, products and options.
It might be that same lack of confidence that lies behind another research finding revealed when Natixis Investment Managers released the latest iteration of its Global Retirement Index.
This index benchmarks the various aspects of retirement that it says contribute to a healthy and secure retirement. Among other things, it found the median retirement age for Australians is 65 compared to the global median of 61. This is despite Australia placing in the top 10 for retirement security.
There could be a host of reasons Australians generally retire later than people in other, similarly affluent countries. But it seems likely one of those reasons is a lack of confidence in being able to accumulate enough to live on comfortably in retirement.
It might be that Australians simply want or expect a more lavish lifestyle in retirement than people in other countries. It could be that they overestimate how much they need to accumulate to be able to do that. There’s also possibly a mindset that superannuation is a tax-effective way to pass wealth on to future generations, so you’d better cram as much in there as you can, even if it means working longer.
On the issues that create a healthy and secure retirement – grouped under the main headings of health, quality of life, finances in retirement and material wellbeing – Natixis found Australia ranked seventh of 44 countries analysed, behind Norway in first place, then Switzerland, Iceland, Ireland, Luxembourg and Netherlands. Australia ranked ahead of New Zealand, Germany and Denmark as the other countries in the top 10.
The Natixis research suggests the Australian superannuation system is doing a pretty good job of helping Australians get set for retirement, but it could do better.
It’s not just about cranking up the level of contributions (which some argue are already leading to “over-saving”) or tinkering further with the rules.
The Class research suggests the complexity of the system is creating a group of “haves” (those who are advised, and who are often SMSF members), and one of “have-nots” (primarily members of APRA-regulated funds).
The task facing trustees of APRA-regulated funds is to slash the number of “have-nots” by developing the advice and guidance and the product solutions they need to make maximal use of the superannuation rules.
The challenge is how to do that at scale, cost-effectively, and in a way that works for every member – whenever they might retire.