Thu Dec 21

It's not just about accumulating super. Australians need to learn how to spend their retirement savings

Written by Marc Olynyk, Director of Financial Planning, Deakin Business School, Deakin University

Australia’s superannuation and retirement income system is complex and difficult to navigate.

Retirees need to make decisions on numerous issues where they have less than full information and understanding, both financial and non-financial. They also require access to retirement products to help them manage and balance income needs against longevity risk.

Recognising these issues, the government released a discussion paper ^[1] this month seeking views on three key issues:

helping super fund members navigate the retirement income system
supporting superannuation funds to deliver better services
making retirement income products more accessible.

Australia has one of the largest and most sophisticated pension systems in the world. Valued at more than A$3.5 trillion ^[2] as at September 2023, and is the 5th largest pension scheme ^[3] in terms of asset size.

It is also the 5th most highly rated retirement income system ^[4] internationally behind the Netherlands, Iceland, Denmark and Israel.

What is wrong with the super system?

But while the super system ranks highly in terms of integrity and sustainability, the numbers are not as flattering when it comes to “adequacy”.

Adequacy is the level of income available to retirees depending on their different circumstances. According to a recent study ^[5], Australia is ranked 20th out of 47 worldwide on the adequacy index.

Reform ^[6] in the pre-retirement phase of Australia’s retirement income scheme is ongoing and designed to support accumulating wealth for retirement.

Unidentified man taking notes as he puts money into a jar

Much emphasis has been placed on accumulating super with less attention being given to actually using it. iHumnoi/Shutterstock ^[7]

These ongoing reforms have been designed to make superannuation easier to understand and to reduce much of the decision making required. They’ve been needed because of an apparent lack of skills, interest and financial literacy among Australians.

While the message that we need to save to be comfortable in retirement is getting through, the lack of information about how to manage these savings once we retire means many retirees are left to navigate the complex system as best they can.

Given the complexity and volatility of Australia’s financial system, it’s hardly surprising many of the decisions made by retirees don’t produce the best financial results. For example, more than 84%^[8] of retirement savings are held in account-based pensions which, if not properly managed, can run out. This is despite government and community awareness that outliving your savings is a real possibility.

About 50% of retirees currently withdraw at the minimum pension rate, which means many people experience a lower standard of living than what would normally be expected with the super they have accumulated. This can result in wealth not being used and instead being passed on to the next generation.

Help is needed now because the retiree sector is booming

Over the next decade there is going to be a big increase in the number of people retiring and transitioning from the accumulation phase of their super to the pension phase. It’s estimated 2.5 million ^[9] Australians will move to the retirement phase in this period.

Following the 2014 Financial System Inquiry ^[11], the government introduced the Retirement Income Covenant ^[12] in 2022 to force super fund trustees to develop a strategy that would provide better retirement outcomes for their members.

Large crowd of people moving through a foyer

In the next ten years about 2.5 million Australians will move into the retirement phase of super. r.classen/Shutterstock ^[13]

The strategy is based on retirees maximising their expected retirement income, managing expected risks to their retirement income and having flexible access to super funds during their retirement.

A 2022-23 review conducted by Australian Prudential Regulation Authority and the Australian Securities and Investments Commission ^[14] found while trustees were providing more help to retirees, overall there was a lack of progress and urgency among trustees to improve retirement outcomes.

How the system could be improved

Several proposals have been put forward to improve the experiences and decision-making of retirees. These have included:

improved support from and education by superannuation fund trustees
changing how people view their super savings from an accumulation of wealth to a system that enables drawdown of retirement savings over time to fund expenses.
providing an automatic rollover of retirement savings into an income-stream instead of allowing a lump sum withdrawal on retirement
expanding existing income products (that are starting to be offered by several financial institutions) which combine providing investment choice with a pension for life
setting up a MyRetire product that would run parallel to MySuper ^[16] and provide a simple and cost-effective retirement income system for less engaged members. MySuper only applies to the accumulation phase. Once a member starts an income stream in retirement, their MySuper account ceases
improving access to financial planning advice which is shown to play a significant role in preparing Australians for retirement.

The government, superannuation industry and the community all have a greater role to play in improving the financial outcomes and experiences of retirees.

With Australia’s ageing population, the need to better support retirees to achieve a dignified retirement is becoming more urgent.

All Australians expect and deserve a financially secure retirement.