Lower rates eat into retirees' income

The Reserve Bank's rate cuts benefit 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 rate cuts benefit young people at the expense of the old, retirees say.

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 RBA rate cuts affected retirees' income and term deposit returns?

The article says recent Reserve Bank rate cuts have eroded term deposit returns that many retirees rely on. The RBA cut about 125 basis points from the cash rate over the past eight months, which RateCity says trimmed more than one percentage point from three‑month term deposits. Some retirees reported monthly income drops of more than $100 and have had to cut expenses as a result.

Why are retirees shifting more of their superannuation into cash and term deposits?

Many retirees shifted money out of shares after market falls and the global financial crisis to avoid losses. SuperRatings data shows the cash share of allocated pensions rose from 3.7% in 2008 to 12.1% this year, and holdings in cash and term deposits in self‑managed super funds surged 40%—reaching $114.9 billion—reflecting a move toward lower‑risk cash holdings.

What changes have occurred in allocations to balanced investment options in allocated pensions?

According to SuperRatings, allocations to balanced investment options in allocated pensions fell from 56.2% to 40.6% over the same period that cash allocations rose, indicating many pension investors are reducing exposure to diversified growth assets in favour of cash.

How has the performance of the S&P/ASX 200 influenced retirees' investment decisions?

The S&P/ASX 200 was trading about 40% below its 2007 highs, and recent global market wobbles contributed to the RBA's rate cuts. Those market declines prompted many retirees to move out of shares into cash and term deposits to protect capital, even though lower interest rates have reduced income from those cash holdings.

What has happened to holdings in self‑managed super funds (SMSFs) recently?

The article notes SMSFs increased holdings in cash and term deposits by 40% to $114.9 billion, while listed share holdings grew about 20% to $122 billion—showing strong growth in cash allocations alongside continued exposure to listed shares.

Are retirees receiving any government support to help offset lower returns from term deposits?

Yes. The article states the government lifted the aged pension by $4.70 a fortnight in March, bringing the payment to $524.10 per person in a couple. While helpful, some retirees in the article said that modest increase still leaves them tightening their budgets.

What concerns did industry experts and retiree groups raise about lower interest rates?

Industry voices quoted include Warren Chant of Chant West, who said older retirees stung by the global financial crisis have moved into term deposits and are now hurting from lower rates, and Amelia Christie from the Combined Pensioners and Superannuants Association of NSW, who said many of the group's 30,000 members are tightening belts because fixed‑income retirees struggle with reduced interest receipts.

What practical steps are retirees taking when income from term deposits falls?

The article gives examples: some retirees cut living expenses—one couple reported having to trim more than $100 a month—and many shifted allocations out of shares during market downturns into cash and term deposits. It also highlights that this defensive posture has increased cash shares in allocated pensions and SMSFs, even though lower interest rates have reduced income from those cash holdings.