The future of the Account Based Pensions

Australia has one of the most complex retirement income systems in the world. The primary reason for this complexity is that our superannuation system passes nearly all financial risk and decision-making on to individual retirees.

Historically, retirees and their advisers were faced with a dichotomy when it came to selecting retirement income products. At the one extreme there are account-based pensions – where all investment risk and longevity risk rests with the member. At the other extreme are the traditional lifetime annuities – where an insurer guarantees the longevity risk, the risk that the retiree outlives their financial resources – by providing guaranteed income for life, which has often been the more expensive option. It is no surprise that the common strategy many retirees have opted for is to spend and utilize their account based pensions knowing that as funds are spent over time, assessable assets (from Centrelink’s point of view) will also decrease meaning retirees will either find they qualify or increase their Centrelink Age Pensions.

However, recent studies of Centrelink data reveal a flaw in this strategy as many pensioners find they spend little of their capital once reliant on Centrelink’s Age Pension.

The main reasons for this are the fear that reducing account balances will leave retirees short of income later in life to cover living expenses, or planning for possible larger expenses such as health costs, aged care etc. Another unknown variable is that people simply do not know how long they will live, so a natural response to this is to err on the side of caution and maintain a cash reserve, this means millions of retirees are self-insuring their own longevity risk. The question that is being raised by industry experts is whether Australia has outlived the account-based pension?

Those wanting a higher lifestyle than the age pension can provide must meet a complex balance between spending now and preserving some assets for spending later in life. This balancing act requires extremely sound financial planning advice that takes risk into account and their specific circumstances.

We specialise in giving you balanced information to assist you in making the best-informed decision for your own circumstances ……please contact us to have a chat.