Having focused mainly on wealth accumulation up until now, Australia’s superannuation system is finally turning its attention to designing better regular income arrangements for retirees, and to the risk that retirees will in many cases end up running out of money.
While there is a lot of consumer awareness about the need to build up money for retirement, Australia desperately lacks a good retirement income system. Far too little attention has been placed on innovative ways to help retirees turn their superannuation balances into a series of payments that they can draw down over their lifetime.
With Australians living longer than ever, two key questions confronting retirees today are: one, how long am I going to live, and two, how do I spread the money I’ve accumulated out over my lifetime?
Within our submissions to the Australian Government’s Financial System Inquiry (FSI), TAL championed the need for a national income policy upon which more longevity products — currently hampered by existing regulatory barriers — could be brought to market.
Drawing from the experience of our parent company Dai-ichi Life, TAL expects to bring new longevity products to the Australian market given the appropriate regulatory settings.
Post-retirement products needed
Over time, we expect to see more longevity products like annuities, deferred annuities and other products that help people manage income throughout their retirement.
Due largely to the regulatory complexities governing them, there are very few post-retirement products on offer today.
Another barrier to developing annuities — which provide sums to retirees at least annually — is insufficient awareness and understanding by consumers to make informed choices. Ultimately, we want consumers to have better options available to help them make choices to meet their retirement needs.
In most cases this requires advice, and there simply are not enough advisers to go around. As a result, consumers and advisers alike generally struggle to understand how these highly complex financial products actually work.
Overcoming barriers
At the moment there are some disincentives for people to take income streams in retirement or to accumulate funds for a deferred annuity which will be payable in their advanced years.
The growing number of baby boomers rapidly approaching retirement only intensifies the need for the disincentives deterring people from taking income in retirement to be fixed.
Like TAL, the life insurance sector is highly optimistic that the government will make some changes to help this work better. It is one of those rare political topics where both major parties share the view that more needs to be done to deliver better retirement outcomes, through an enlightened retirement income policy.
We’re not looking so much for more tax incentives, as tax neutrality.
Unsurprisingly, due to their sheer complexity and lack of tax neutrality, many of the complex products brought to the market in the annuity space have unceremoniously failed.
These product failures should remind product providers that consumers want simplicity and don’t expect to be worse off, just because they decide to put away some money on their retirement to pay them an income into future years.
Similarly, while deferred lifetime annuities (DLA) – often referred to as the purest form of ‘longevity insurance’ – would go a long way to ensuring a retiree’s lifestyle is maintained during the last stages of life, few if any of these products have been developed locally.
While the earnings on the money you put aside to pay you an income into the future via a DLA should be tax-free – because it will ultimately form part of your income in retirement – it currently remains taxable which makes an otherwise good product highly ineffective.
New products and providers
It is far better for individuals and Australia at large to provide people with incomes in retirement rather than access to lump sums. The danger is that retirees who mismanage with poor investment or spending decisions, reduce or lose their lump sum during the early stages of retirement will be overly reliant on the Government pension for support.
So annuities have a significant role to play in turning lump sum superannuation into income streams. But as long as annuities remain complex financial products, the only real way for consumers to tap into them is via an adviser.
However, it is expected this will change over time as new annuity-type products are brought to market by a wider range of providers. In time, we will see the major superannuation funds presenting retirement income options to their clients that they have vetted and endorsed. They will seamlessly partner with longevity providers for optional covers that members can choose if they wish.
Given that there are not enough advisers to cover everybody’s retirement needs, I think future partnerships and fund approved solutions are the best way of getting the biggest cut-through for most people into the retirement incomes or annuities market.
There’s clearly mounting pressure for super funds and life insurers alike to step up to the plate with new, innovative and more consumer-friendly annuity-type products.
We need simpler products, tax neutrality, and a lot more consumer education on why these products exist, and how they work.
Jim Minto is the chief executive officer for the TAL Group.
