Produced in partnership with Generation Life.
Confidence in retirement is the superannuation and wealth management industry’s holy grail but there are many internal and external factors that can undermine that confidence.
Two of the biggest are market volatility and ongoing changes to the super rules, which are currently front of mind due to heightened economic and geopolitical uncertainty, and the whether the Government’s proposed Division 296 tax on earnings on superannuation balances above $3 million will be reintroduced.
But there may be other subtle factors at play too, including the industry’s lopsided focus on accumulation for the best part of the last 30 years, being supported by increasing the superannuation guarantee to 12 per cent, maintaining maximised contribution caps and minimised drawdown rates.
As an unintended consequence of navigating a complex system, Australians have developed an irrational fear of running out of money, leading many to die with the bulk of their retirement savings intact, according to the government’s 2020 Retirement Income Review.
The antidote to that fear, and the key to financial confidence, is education and professional advice, according to Generation Life chief executive Felipe Araujo.
“Superannuation is a phenomenal retirement savings vehicle but since the introduction of the super guarantee in 1992, some have lost sight of exactly what super is for, and now see it as a tax-advantaged vehicle for storing wealth but not necessarily for that wealth to be fully consumed,” he tells Professional Planner.
While the government has taken important action to formally legislate the objective of super (to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way), more must be done to educate Australians that super is meant to be exhausted and there are tax structures outside super for building wealth, supplement retirement income, and intergenerational wealth transfers, Araujo says.
He lists these structures as personal savings, investment bonds, discretionary family trusts and investment companies.
Alongside super, they can be used to help retirees create a stable, regular income stream for life, and manage key risks including longevity risk, sequencing risk, and the desire to transfer wealth safely and tax effectively to the next generations.
They’re also important vehicles for wealth accumulators, particularly given the government’s consistent track record of tinkering with the super rules.
“If there will be further changes to contributions caps and the taxation of super, it’s important for accumulators to understand that they should not solely rely on superannuation and may need to utilise alternative vehicles,” Araujo says.
“Financial advisers play a crucial role in educating Australians about their options and what’s most suited to their current and future needs.”
According to Araujo, the industry is in the midst of an exciting structural shift, driven by product innovation and an increasing understanding that there’s more to retirement savings than superannuation.
“We’re moving away from thinking that there is a single lane – and that lane is superannuation – to recognising that multiple lanes are open and more choices are available,” he says.
“We’re starting to see more capital get deployed across other structures and that will accelerate.”
However, a major inhibitor to the greater use of alternative structures is the industry’s reliance on jargon to explain concepts and ideas, Araujo says.
This is evidenced by the lengthy glossary of terms attached to every financial document, which only adds confusion and uncertainty, and may repel people from maintaining active involvement in the investments of their money.
“There’s often too much jargon in communications, when all people want to know is what does it all mean for me? They want to know, in simple terms, how structures and products work and interact, and their benefits and disadvantages,” Araujo says.
“When you ask retirees and pre-retirees what they want, and really listen to their responses, they’re often describing features that point directly to a lifetime annuity. The fact that they don’t recognise it by name shows the opportunity to educate Australians about their options.”
When it comes to education and confidence, Australians may benefit from greater certainty around retirement policy and tax – including social security – to aid effective planning.
“People are seeking guidance on what the superannuation landscape will look like in the near future and beyond, to decide on the best structures in the marketplace for them to plan with certainty, identify opportunities and understand the consequences of certain decisions, but there’s currently little that’s straightforward about potential super reforms,” Araujo says.
Putting aside legislative changes and the direction of markets and interest rates, which are beyond any investors’ control, Araujo urges investors and advisers to focus on things within their control.
“In what seems to be an increasingly unpredictable policy environment, investment bonds offer a tax effective complement [to superannuation], with no contribution caps, no preservation rules and no shifting tax thresholds,” he says.
“As a tax-paid, politically insulated structure, they can provide long-term certainty in a system where the goalposts have been shown to constantly shift, making them especially valuable for investors seeking to better future-proof their strategies and gain certainty around their futures.
