CIPRs won’t trump good advice
Comprehensive Income Products in Retirement and a Retirement Incomes Covenant represent a very poor substitute for retirees seeking personal financial advice, according to the Association of Financial Advisers (AFA).
The AFA has used its response to the Treasury’s Retirement Income Covenant discussion paper to argue almost as strongly as the Financial Planning Association (FPA) against the notion that CIPRs and a covenant represent a definitive post-retirement answer.
“Whilst we accept the proposition that the retirement income market in Australia is underdeveloped, we do not agree that the solution is for superannuation fund trustees to design pre-packaged retirement income solutions,” the AFA said. “We think that this is a very poor substitute for retirees seeking personal financial advice that is tailored to their needs, objectives and personal circumstances.”
The AFA response said retirement or the period in the lead-up to retirement was a period of huge change and necessarily required extensive preparation.
“Much of this change is unrelated to the member’s superannuation account,” it said. “It is important to appreciate that this is not simply a financial transition, but also an emotional transition.”
The AFA submission noted that the divorce rate spikes in the period following retirement and that “getting this transition right requires quality advice”.
“It is overly simplistic to think about retirement as a transition from an accumulation phase product to an income stream product and expect that this can be done with some general advice and a simplified decision set,” the submission said.
It said that in terms of a Comprehensive Income Product for Retirement, the AFA had noted the likely inclusion of an account-based pension and a lifetime annuity or a deferred lifetime annuity.
“There is certainly an additional level of complexity for a superannuation fund in running an account-based pension, however it is a very different proposition to offer lifetime annuities or deferred lifetime annuities where the product provider is taking on substantial product risk,” the submission said. “This requires significant capital and substantial additional resources (ie. actuarial).”
“We are particularly concerned about the implications of the average superannuation funds developing this capacity and taking on this risk.”
The AFA also pointed to Challenger’s dominance in the annuities space, stating that an analysis of the lifetime annuity marketplace “shows that it is dominated by one player and there is very limited competition”.
“We pose the question as to whether if these products are available, and clients can choose to use them, then why has the market evolved as it has?” it said. “This is not to say that we don’t support annuity products. In fact, they are very much appropriate for some clients, particularly those who are risk-averse and have reasonable grounds to suggest that they will continue to live long lives.”
“For anyone with a family history or personal health history that suggests a shorter remaining lifetime, then they may not be appropriate.”
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