Retirement income certainty: Is this achievable?

And should you be ‘pushed’ into a retirement income product. Would that be in your best interests?

At the heart of most retirement wants lies the desire to have a strong degree of control, in the form of a secure, dependable retirement income. No surprises here. Volatility in financial markets such as that experienced during the GFC are recent memories of sudden losses that affected many retirees adversely. With the exception of the minority of retirees on a Defined Benefit Pension (DBP), the income of many older Australians remains strongly tied to the performance of financial markets, as that is where their superannuation is invested.

The Federal Government has recognised the concerns held by retirees and is expecting that super funds will engage more with their members, support their decision-making to achieve the best retirement income outcomes possible. This, in a nutshell, is what the Retirement Income covenant (a recommendation by the 2020 Retirement Income Review) requires. But the regulators believe the funds are too slow in their support of members. A recent Consultation Paper has included a template for a ‘generic ‘Lifetime Income Stream’ as an example of a product funds could offer members so that members could achieve more predictable income more simply.

The language around this offering is that super funds need to do more to ‘nudge’ members towards such a form of retirement income. It includes suggestions that members be defaulted into such a product, meaning if they do nothing else their super would be moved to a government approved Lifetime Income Stream. Defaults can be ‘hard’ – meaning forceful – or ‘soft’ meaning they are a last base action in the absence of any other activity by the member.

What does this mean for you?

How do you meet the challenge of understanding if this is a good or bad strategy for your circumstances? As always, there is no one-size fits all in this scenario even though a default option sounds like that is what is being suggested here. Let’s zoom out for a moment and consider three different situations which might help you better understand this proposed initiative.

Situation #1 Age Pension

The often overlooked factor of retirement income is that the Age Pension already offers a secure, guaranteed for life income in retirement. The singles and couples payments are indexed twice a year to ensure the amount stays in touch with wages and cost of living and concession cards ensure that every day medical expenses remain affordable. This is a solid base that is available to all Australian residents aged 67 and over, provided that they pass the means test. Nearly two-thirds (63%) of Australians will enter retirement with a full or part-Age Pension, and 80% will qualify by the time they are 80. Part-pension entitlements mean that many Australians can use their fortnightly Centrelink entitlements as a base salary which is complemented by work income or income from other savings or assets.

Situation #2 Part Pension part Account-Based Pension (ABP)

Of the 63% of older Australians on an Age Pension, about one third (30%) are on a part pension. This is because either their assets or income is above the limit for the full payment. Part pension payments decline as assets and income increases (see all thresholds here) until zero entitlement status is reached. However those who qualify for a part-Age pension (assuming no change in assets) also receive a guaranteed income with concession cards. Typically, part age Pensioners will supplement their government payments with withdrawals from their super, usually in the form of an Account-Based Pension. When their super is in such a pension, no tax is payable on the earnings. The combination of these two forms of income is the most common form of retirement funding and (depending on how funds are withdrawn) can provide an adequate, regular income stream across the retirement years.

Situation #3 Age Pension (full or part) and Lifetime Income Stream

Lifetime Income Streams (an annuity is an example) can provide income over a fixed period of time or for the rest of your life (we have previously covered the pros and cons of these products). The appeal of something guaranteed for life is obvious, but these products can sometimes be difficult to understand as different companies will charge in different ways for a similar type of income stream. For this reason, there has been a slow uptake in this form of retirement income, but many such products are now being offered by super funds. The newer forms are often indexed and simpler to understand. That said, most retirees seek financial advice in order to understand the net benefit of such an income stream, the actual costs and whether the sense of security is something they are prepared to pay for. Some product providers discuss lifetime income streams as an adjunct to the Age Pension, others will suggest they complement both Age Pension income and that from an ABP – i.e. three different ‘pots’ of income on a regular basis. Centrelink also treats the funds in such a lifetime income stream slightly differently to money in an ABP. The relative benefits from this different treatment also need to be considered.

So it may help you to review your own situation and decide if you will fund yourself:

• Largely Age Pension funded 
• Using a mix of Age Pension and super via an ABP
• Open and flexible to the notion of a mix of any one of the three: Age Pension, super withdrawals and lifetime income streams

Caveat

Beware, however, when considering which mix is right for you. The above brief overview does not take into account circumstances such as:

• Potential to use ‘younger spouse’ rules
• Work income
• Other private savings
• Home ownership
• Debt

Neither does it factor in specific Centrelink rulings on Age Pension eligibility, the treatment of an ABP as an asset and how this is deemed, treatment of other types of income streams and tax implications.

Each retirement journey is very different, so it is important to seek advice as and when you are facing a different stage and need.

What is likely to happen?

To return to whether you should be pushed into a lifetime income stream because, ultimately, it will be better for you. You shouldn’t be pushed into anything. The role of the government is to provide a regulatory framework, information on retirement income options and nudges and reminders about the timing of these options. 

As mentioned above, this is a suggestion only, included in a Consultation Paper to start debate about how funds can more actively support members moving from the saving to spending phase of retirement. 

It’s important to trust yourself to make your own best decision, supported by qualified, professional advice when needed.

If you would like to explore the possible optimal retirement income ‘mix’ for your circumstances, our trusted advisers are happy to help you explore any of the above ways to maximise your income.

Should you be nudged?

What’s your take on the idea of a default Lifetime Income stream? Is it helpful?