Retirees feel the pinch of falling interest rates

Lower rates are eroding the retirement savings of many Australians, writes Chris Zappone.

By InvestSMART · 25 Jun 2012

By InvestSMART ·
25 Jun 2012

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Lower rates are eroding the retirement savings of many Australians, writes Chris Zappone.

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 mainframe computer programmer preparing for his retirement, a 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.

Mr Logan holds little hope that rates 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 age who shifted funds out of shares to avoid the losses seen 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 ASX 200 index trading 40 per cent below its 2007 highs, the wobbles on global markets have pushed the Reserve Bank to cut 125 basis points from the cash rate in the past eight months alone, trimming more than a full percentage point from three-month term deposits, according to RateCity.com.au data.

A Canberra retiree said his monthly income had dropped by more than $100. With the shares contained in his allocated pension also slipping in value, he and his wife have no choice but to cut back on 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 into 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, the 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 super 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 GFC [global financial crisis] and you're really stung," said Warren Chant, the director of superannuation research group Chant West.

"Many have gotten out of superannuation environment and just invest their money in term deposits. They're the ones who are hurting."

Amelia Christie, a research policy officer at the Combined Pensioners and Superannuants Association of NSW, 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," Ms Christie said.

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Frequently Asked Questions about this Article…

How are falling interest rates affecting retirees' savings and income?

The article explains that Reserve Bank rate cuts have reduced returns on term deposits and cash holdings, which many retirees rely on for income. Several retirees reported lower monthly income (one said it dropped by more than $100), while others have seen the growth of their term deposits eroded, squeezing living budgets for those on fixed incomes.

Why are many retirees shifting money from shares into cash and term deposits?

After recent market volatility and past losses, some retirees have moved funds out of shares to avoid further market risk. The article cites data showing the share of cash in allocated pensions rose from 3.7% in 2008 to 12.1% this year, and SMSFs increased cash and term deposit holdings as retirees sought safety rather than exposure to share-market swings.

What impact have Reserve Bank rate cuts had on term deposit returns?

RateCity.com.au data referenced in the article shows the Reserve Bank cut 125 basis points from the cash rate in the past eight months, trimming more than a full percentage point from three-month term deposit rates. That fall in official rates has directly reduced interest income from term deposits for retirees and SMSFs.

How have allocated pension and balanced option allocations changed for retirees?

The article reports that cash allocations in allocated pensions rose to 12.1% this year from 3.7% in 2008, while allocations to balanced investment options in allocated pensions fell from 56.2% to 40.6% over the same period—illustrating a shift toward safer, lower-yield cash holdings.

Are self-managed super funds (SMSFs) also affected by lower interest rates?

Yes. The article notes SMSFs have increased holdings in cash and term deposits significantly—up 40% to $114.9 billion—while listed shares in SMSFs grew 20% to $122 billion. Many SMSF members who moved to term deposits are feeling the pain of lower returns caused by rate cuts.

Who is benefiting and who is losing out from the recent interest rate cuts?

According to the article, younger people with mortgages are generally benefiting from lower rates, while older Australians, retirees and those with fixed-income investments are losing out because reduced official rates translate into lower interest income on cash and term deposits.

How are retirees responding to reduced income from lower interest rates?

Retirees quoted in the article described tightening their budgets and cutting back on expenses. One Canberra retiree said he and his wife had no choice but to reduce spending after their monthly income fell, and others who avoid gambling, smoking or drinking still face limited options to trim costs further.

What do superannuation experts say about retirees moving into cash because of market fears?

Warren Chant of Chant West and Amelia Christie of the Combined Pensioners and Superannuants Association of NSW are quoted saying many older people were stung by past market downturns (including the GFC) and have moved into term deposits and cash for safety. Those who have done so are the ones most affected by the current low-rate environment, Christie adds, because they rely on fixed-income returns.