Lower rates eat into retirees' income

THE Reserve Bank's recent rate cuts are benefiting young people at the expense of the old, retirees say.

By InvestSMART · 25 Jun 2012

By InvestSMART ·
25 Jun 2012

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THE Reserve Bank's recent rate cuts are benefiting young people at the expense of the old, retirees say.

For John Logan, a 66-year-old Melbourne-based mainframe computer programmer preparing for his retirement, the slide in interest rates has eroded the growth of his term deposits and he is unmoved by complaints of younger mortgage payers.

"I put up with 18 per cent interest rates when I was their age," he said.

There is little hope rates will be nudged up to protect the savings and cash holdings in his self-managed super fund.

His frustration is felt by a generation of people at or near retirement who shifted funds out of shares to avoid losses in the past few years, only to watch in dismay as the banks whittle away their returns in response to lower official rates.

With the S&P/ASX 200 Index trading at 40 per cent below its 2007 highs, the most recent wobbles on global markets have pushed the RBA to cut 125 basis points from the cash rate in the past eight months alone, trimming more than one percentage point from three-month term deposits, according to data from RateCity.com.au.

Another Canberra-based retiree said his monthly income had dropped by more than $100. With the shares in his allocated pension also slipping in value, he and his wife have no choice but to cut expenses.

"We can't cut much more," said the 71-year-old father of five, who volunteers in his spare time. "We're not much in drinking, neither of us smoke and we don't gamble at all."

The share of cash in allocated pensions has risen from 3.7 per cent in 2008 to 12.1 per cent this year, superannuation tracking group SuperRatings said. Allocations to balanced investment options in allocated pensions sank from 56.2 per cent to 40.6 per cent in the same period.

A similar shift has occurred with self-managed superannuation funds.

Holdings in cash and term deposits in self-managed super funds have soared 40 per cent to $114.9 billion, nearly double the pace of the increase in listed shares, which grew 20 per cent to $122 billion.

"If you're 75, you've seen the global financial crisis and you're really stung," said superannuation research group Chant West director Warren Chant. "Many have gotten out of superannuation and just invest their term deposits," he said. "They're the ones who are hurting."

Combined Pensioners and Superannuants Association of NSW research policy officer Amelia Christie said many of her group's 30,000 members were tightening their belts because of lower rates on term deposits.

"They definitely struggle with that because they've got a fixed income effectively, so it does affect the amount of interest they receive," she said.

Retirees, though, typically have other support. The government has lifted the aged pension payment by $4.70 a fortnight to $524.10 per person in a couple in March.

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Frequently Asked Questions about this Article…

How have recent Reserve Bank rate cuts affected retirees' income?

The RBA has cut the cash rate by 125 basis points over the past eight months, and that has trimmed more than one percentage point from three-month term deposit returns, according to RateCity.com.au. Retirees who rely on term deposits and cash in self-managed super funds have seen their interest income fall, with some individuals reporting monthly income drops (one Canberra retiree said his income fell by more than $100).

Why are many retirees shifting money into cash and term deposits in their superannuation?

After recent market volatility and memories of big losses (for example, experiences during the global financial crisis), many retirees moved out of shares into cash and term deposits to protect capital. Research groups cited in the article note that holdings in cash and term deposits in self-managed super funds rose 40% to $114.9 billion, reflecting a preference for safety even though interest rates are lower.

What changes have occurred in allocated pension investment allocations?

SuperRatings data in the article shows the share of cash in allocated pensions rose from 3.7% in 2008 to 12.1% this year, while allocations to balanced investment options fell from 56.2% to 40.6%. This signals a shift toward more conservative, cash-heavy holdings among pension investors.

Are retirees cutting back on spending because of lower interest rates?

Yes. The article quotes retirees who say they have little choice but to tighten their budgets after interest income fell. The Combined Pensioners and Superannuants Association of NSW also notes many of its members are struggling with lower term-deposit rates and are trimming expenses.

How has the performance of the share market influenced retiree behaviour?

With the S&P/ASX 200 index trading about 40% below its 2007 highs and recent global market wobbles, many retirees who feared share-market losses shifted into cash and term deposits. That move was driven by a desire to avoid further share-price falls, even though it means accepting lower interest income.

What does the article say about self-managed super funds (SMSFs) and their holdings?

The article reports that SMSF holdings in cash and term deposits jumped 40% to $114.9 billion, nearly matching the growth in listed shares, which rose 20% to $122 billion. This shows SMSF trustees increased cash allocations substantially in response to market conditions.

How much have short-term deposit returns been reduced, according to the article?

RateCity.com.au data cited in the article says the RBA's recent cuts have trimmed more than one percentage point from three-month term deposit rates. Overall, the cash rate has been cut by 125 basis points over the last eight months mentioned in the story.

Has the government provided any extra support for pensioners amid lower interest rates?

The article notes the government increased the aged pension payment by $4.70 a fortnight in March, bringing the payment to $524.10 per person in a couple. That boost is one form of support mentioned for retirees facing lower investment income.