Future-proofing retirement income

The national debate on funding Australians’ super-long retirements will kick off, officially, tomorrow night in the Budget.

Treasurer Joe Hockey flagged a few weeks back that the nation needed to have a big chat about how we look after the elderly in terms of their retirement incomes – it’s going to be expensive and we can’t leave the discussion until “Baby Boomers” are mostly on the wrong side of 70.

Hockey will springboard off the recommendations from the National Commission Of Audit, which I covered in this column last week (How the pension axe could fall).

But the NCOA’s report largely only covers the issue from the perspective of the government’s bottom line – revenue and expenditure.

The recommendations included reducing the age pension and access to the Commonwealth Seniors Health Card, increasing the age pension age and the super access age, and including the value of the principal place of residence (home) in tests that lead to access of government payments.

They do, in essence, cover the direct taxpayer handouts to the aged and how to manage and, slowly, reduce their cost to the public purse.

Major rethink on private savings

The other side is what happens to private retirement savings – predominantly superannuation. This side of the equation gets constant tinkering, arguably without as much thought to that bigger picture.

Bigger picture stuff includes the shift from 9% to 12% for the superannuation guarantee, which is in train, if now delayed, by recent governments. (At some stage, it might need to go to 15%.)

But in the wake of the NCOA report, others – including former prime minister Paul Keating – are proffering their own suggestions for improving retirement income streams (see Keating’s “longevity levy” recommendation below).

Compulsory annuities

It’s something no government has seriously considered. But it will have to be considered at some stage.

Forcing Australians to turn a part, or all, of their superannuation into a non-commutable pension or annuity at retirement seems somewhat inevitable.

Too many Australians have worked the following super rort out. In knowing that they can get access to their super at a given age (somewhere between 55 and 65, with no current restrictions once you turn 65), they are pre-spending their super. (In fact, there are perverse incentives to do so.)

A study by CPA Australia in 2012 showed that Australians were spending their super before they received it. Between 2002 and 2010, debt was run up. But soon after retirement, super was accessed to pay down debt.

The argument was that we get twice yearly superannuation balances posted to us in the mail, allowing Australians to see that in, say, 5-10 years, they will receive about $200,000. Given that relative certainty, they can pull forward spending over that period to run up $200,000 worth of debt that they know they’ll have the money to repay when they can access their super.

You can use your home to access equity like it was a credit card.

The built-in problem here is that when you hit preservation age and retire, you can access your entire superannuation balance, whether that be $50,000 or $1 million or more.

While this is less likely to be commonplace among SMSF trustees – because they are more actively planning around retirement income streams – if those who spend their super early then fall back on a larger government age pension, it hits the taxpayer.

Further, as pointed out by NCOA, an individual that owns a $3 million home, with $100,000 of shares, will get a full age pension. However, a couple with a $500,000 home and $1 million in shares won’t get a cent of the age pension, despite having half the wealth.

Under the current system, there is actually an incentive to upsize your home, before or after retirement, to spend your super to then get access to the age pension.

Sooner or later, the government will have to stop Australians accessing their super as a lump sum, or heavily restrict it.

This could potentially involve only allowing access to a defined percentage of your super as a lump sum, with the rest to be turned into a lifetime annuity or non-commutable pension.

The advantage of a lifetime annuity is knowing, even if it’s only $50 a week, that you will have more than the government age pension for the remainder of your life.

Longevity fund

And then there’s the concept of a “longevity fund” raised regularly by Paul Keating.

The idea behind this concept is a further levy of 2-3% on taxable incomes that acts like an insurance policy. Everyone pays the tax, but if you die before turning 80, bad luck.

“It’s a classic insurance thing,” Keating said last week. “It’s like the houses in the street: you pay your insurance, but only one house burns down. What happens? One person dies earlier, but their work and savings subsidise other people who last into their late 90s.”

However, this is just another tax.

Another way of taking the strain off the public purse would be, for instance, a compulsory deferred annuity that kicked in at age 80.

Pensions and annuities – a longer-term solution

Some argue that the person who is looking at receiving a $200,000 superannuation lump sum (or any sum really) should be forced to allocate it to future income streams, such as something like the following:

When they turn 65 (or preservation age), the following is allowed:

• No more than 40% of the superannuation balance to be accessed as a lump sum.
• About 50-80% of the super balance to be turned into a pension or annuity.
• Up to 25% to be turned into a deferred lifetime annuity, accessed from age 80.

It would stop widespread spending of super before retirement. It would guarantee income streams over and above the age pension for a lifetime. And it would ensure there was some “longevity insurance” for individuals.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au

• The Financial Services Council has launched a proposal to the financial services inquiry recommending that the Australian Taxation Office and the Australian Prudential Regulation Authority band together to address the growing systematic risks in the SMSF sector, such as those arising when members borrow inside their SMSFs to buy investment properties. Under the submission, APRA would be more involved in the macro oversight process.
• SMSFs are increasingly using financial advice when entering limited recourse borrowing arrangements (LRBAs), according to the latest SMSF borrowing data report by self-managed super fund service provider Heffron. Of the small but growing proportion of members using LRBAs in Heffron’s funds under administration, 86% were advised by a financial adviser, the report found.
• AMP has shown a large increase in SMSF assets under administration in its first-quarter results. The wealth management company reported $17.3 billion in assets under administration for the period, up $741 million from the last quarter.