Maximising superannuation is crucial for securing a comfortable and financially stable retirement in Australia. As the nation’s population ages and life expectancy increases, ensuring that superannuation funds are fully utilised has become more important than ever. While many Australians have substantial savings set aside, a significant number of retirees struggle to access or effectively manage their super, leaving funds untapped.
This article explores the barriers to utilising superannuation, the recommendations from the Grattan Institute for reform, and the essential role of education in empowering retirees to make informed financial decisions, ensuring that they can enjoy a secure and fulfilling retirement.
The Growing Importance and Challenges of Superannuation
Superannuation has been a game-changer for retirement finances in Australia since it was finally codified as mandatory under the Superannuation Guarantee (Administration) Act 1992. It is even better when the current federal budget has scheduled the superannuation guarantee to be upped to 12 per cent starting 1 July 2025.
With Australia’s ageing population and increasing life expectancy, the importance of superannuation is only growing. Recent ABS data projects that up to ten million people in Australia will be at least 65 years old by 2050. Federal government figures for 2022-2023 point to less than one in ten Australians being retirees drawing on supers for additional income – that ratio is expected to be close to one in five people by 2063.
However, many retirees struggle to fully tap their superfunds, leaving significant balances untouched, especially when you consider that on the average, Australian singles now have as much as $200,000 set aside and couples/partnerships pooled over $300,000. This trend is concerning, as unused funds may diminish the quality of life in retirement or create unnecessary financial stress. It may even be discomforting too if, for example, the senior passed away with a hefty superfund balance and was not able to properly list or update beneficiaries in time.
Despite its potential, superannuation often presents hurdles for retirees.
Complex Rules and Regulations
The current form of the Superannuation Act can be daunting, with tax implications, withdrawal limits, and eligibility rules creating confusion. Many seniors feel overwhelmed, leading to hesitation in accessing their funds.
Fear of Running Out of Money
A significant number of retirees worry about depleting their superannuation too quickly. This fear drives some to use less supers, potentially sacrificing their standard of living – one example may be to use individual savings for the moment and combine them with their means-tested Age Pension. The challenge still remains with how they can make that income fit their spending levels.
Limited Financial Literacy
Many seniors lack knowledge about how superannuation works or the options available for accessing funds. Misunderstanding annuities, pension drawdowns, and tax-free thresholds can lead to poor financial decisions. Worse, they might not receive the accurate and authoritative guidance needed to fully utilise the large funds, putting them open to exploitation. You might even know someone who lost everything due to a big blunder.
Administrative Barriers
Navigating the processes to access superfunds can be time-consuming and stressful, particularly for seniors unfamiliar with digital tools or financial jargon.
The Grattan Institute Report: A Call to Simplify Superannuation
The Grattan Institute’s new Simpler Super: Taking the stress out of retirement study highlights the need for reforms to make superannuation more accessible and practical for retirees.
The research team collated the most recent data on superannuation for Australians and identified some disturbing facts. On the question of how to use the super in retirement, Australians are hamstrung by what guidance is available to them. The data points to at least four in every five retirees being nudged into account-based pensions that often carry the pressure of carefully managing their expenses to prevent unnecessary spending. Worse, half of those under account-based pension holders tap their super balances at the approved minimal rates, and as a result, as much as 65 per cent of the money is still in the account when they are at advanced years.
Speaking to the Australian Financial Review, Grattan Institute economic security programme director Brendan Coates said the stress of whether the superfund can sustain a senior also led to them becoming net savers as the superfund still grew long after they retire.
Grattan Institute Recommendations for Superannuation Reform
The Grattan Institute team pored over the materials and came up with recommendations.
Government-supported annuity
The first key recommendation brought up was for the federal government to open annuity programmes for superfund holders with balances upwards of $250k. The object is for the government and the senior’s super vendor to guide them by using 80 per cent of their balance for buying an annuity product that will be a lifetime source of income. That annuity must come from a list of approved products. Officials rationalised that the proposed annuity can add 25 per cent more to the retirement income.
Government guidance service
The federal government must be called upon to establish a free assistance service called RetireSmart to provide “general and personal advice” to retirees or would-be retirees in efficiently tapping their retirement funds, plus also assist them in Age Pension applications. The Institute noted the UK’s Pension Wise service as an adaptable model to Australian conditions.
Mr. Coates said this new service should be capable of guiding at least one-third of all new retirees, with a digital portal for RetireSmart accounts synched to MyGov. As for operational funding, he estimated that the government can possibly outlay $360m for the first four years and then set aside $50m in annual budget.
Why would this proposed service assist seniors with applying for an Age Pension? The Institute cited a Link Group study from 2022 which found that 30 per cent of eligible seniors took over a year after reaching the age threshold to apply, as they needed more guidance to navigate the very complicated application regime. In terms of foregone pension income loss, Australian Super estimated a one-year delay as costing a couple $42,000 at full rates (based on rates as of July 2024).
Top Ten Supers List
The federal government needs to appoint an independent review panel to analyse all the active superfund vendors and identify a Top Ten roster that can be objectively promoted to people approaching retirement. The selection criteria will include the vendor’s capacity to generate ample long-term risk-adjusted returns, have credible and sound advisory capabilities, and are well-managed. This recommendation is based on a 2018 Productivity Commission report which suggested the development of a “Best-in-Show” list of super vendors. The fact that the list only has ten slots can drive all the other super vendors to improve their services.
Even though there’s a Top Ten listing, superfund holders will have the choice to stay with their existing vendor.
Account-based pensions under Your Future, Your Super
The Grattan Institute suggested that account-based pensions that some supers offer to retirees be part of the Your Future, Your Super performance test programme implemented in 2021. Evaluators said it had been successful for MySuper products as it enabled the better-performing vendors to absorb those that failed the initial round of tests. In the process, the programme helped save members millions of dollars in contributions that would have otherwise been put in a super vendor later revealed to have underlying structural issues.
APRA Involvement
The three other recommendations have the Australian Prudential Regulation Authority (APRA) as a vital conduit:
- The government must task APRA to conduct and release performance assessments of account-based pensions in its Comprehensive Product Performance Package.
- In line with the above suggestion of performance assessments under the Comprehensive Product Performance Package, APRA must also do the same on private annuity products. The government can use the results to encourage people to select their annuity options under a special comparison tool.
- APRA’s performance assessments of all retirement products and account-based pensions will be the basis for the government to continue with expanding superfunds’ capacity for personal advice to their members, as per the Delivering Better Financial Outcomes package.
Empowering Seniors Through Superannuation Education
One of the most effective ways to improve superannuation usage is through education. By empowering seniors with the knowledge and tools to navigate their superfunds, they can make informed decisions and enhance their quality of life.
Understanding Retirement Income Options
Retirees should be aware of the various ways to convert their superfunds into income, such as account-based pensions, lump sum withdrawals, or annuities.
Clarifying Tax Implications
Many seniors are unaware that superannuation withdrawals are tax-free after the age of 60. Dispelling misconceptions can encourage more confident use of funds.
Planning for Longevity
With retirees living longer, education should emphasise strategies to stretch superannuation savings over an extended period.
Navigating Online Portals and Services
As superannuation becomes more digital, offering seniors digital literacy training can empower them to effectively access and manage their accounts. In the Australian setting, that literacy training needs official material approved by government agencies such as ASIC and the Treasury.
Shifting the Culture Around Superannuation
Australia’s superannuation system is one of the most robust in the world, yet many retirees are hesitant to embrace it fully. Encouraging a cultural shift towards viewing superfunds as a tool for financial empowerment, rather than a last resort, is essential.
Normalising Withdrawals
Seniors should feel confident about using their superannuation to enhance their retirement lifestyle, rather than hoarding it for emergencies.
Promoting Success Stories
Sharing examples of retirees who have effectively used their superfunds can inspire others to follow suit.
Engaging Younger Generations
While the focus is on seniors, educating younger Australians about the importance of superannuation can ensure better outcomes for future retirees.
Aside from the youth component, the advisory strategy also needs dissemination about the system to people who have varying degrees of English proficiency or have disabilities. The Grattan Institute’s recommendation on RetireSmart cited data from the 2021 Census identifying 200,000 Australians at least 60 years old who do not speak English well, and 70,000 who never spoke a word. At least one-third of Australians at least 65 years old have hearing problems as well.
Driving Change in Superannuation
Achieving meaningful change requires collaboration between policymakers, superfund providers, and advocacy groups. A key step in this process is implementing the recommendations from the Grattan Institute report. Some parts of the report may be discussed in legislative sessions and adapted into draft superannuation bills to create lasting reform.
Encouraging innovation within the superannuation system is also essential. Superfund providers may need to develop new, more flexible products that cater to the diverse needs of retirees. Hybrid options, for example, could combine annuities with flexible drawdowns, offering retirees more control over their income streams.
Lastly, regular monitoring of retirees’ financial well-being is crucial. By conducting ongoing assessments, we can identify gaps in the current system and ensure that future reforms are informed by the real needs and challenges of retirees.
Conclusion
Some people claim that even if you have worked all your life to build your nest egg in retirement, the big question is if you are still in good health to relish the fruits of your labour.
The Grattan Institute’s report highlights the urgent need for reforms to simplify the process and empower seniors to make the most of their lifetime savings.
In addressing common barriers, educating retirees, and fostering a cultural shift towards proactive superannuation usage, Australia can ensure that seniors enjoy the financial security and independence they deserve.
The A.S.A.G. Reverse Mortgage
The A.S.A.G. Reverse Mortgage can help seniors to make the most out of their superfunds. A Retirement Planning programme may aim to educate the senior on building more superfunds to cover necessary expenses in retirement, as long as they are not accessed ahead of time lest they attract heavy tax penalties.
Please call A.S.A.G. today at 1300 002 724 or send us an email: info@asagfirst.com.au.
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DISCLAIMER: This article is for informational purposes only and does not constitute official advice. A.S.A.G. is not affiliated with any mentioned brands or companies.