There’s a $2.5bn issue with our super, and it’s costing retirees
Idea
There is a huge wave of people approaching retirement in Australia today. Many will have relatively small balances and limited financial confidence, especially in the next decade as they reach super maturity.
Instead of feeling ready, they feel overwhelmed. They put off dealing with their superiors, put off important financial decisions, and silently hope that everything will be fine when the job is done.
For many of these people, meaningful financial advice is not available. Advice is expensive, often geared towards larger balances and private wealth management, and is increasingly out of reach for those who need help most.
But these are exactly the people who need support to prepare themselves for retirement, to understand how pensions, age pensions, tax-free retirement income and ongoing jobs come together to fund a livable retirement, and to make sure they don’t make costly mistakes along the way.
This is where Australia’s superannuation system needs to change rapidly.
If large numbers of people are overwhelmed, disengaged and unable to access advice, then it is no longer realistic to expect them to make the “right” retirement decisions.
Super funds should be allowed and expected to play a more active role in helping members move from savings to retirement, so that super funds earn tax-free returns and are used to help them live good lives.
This doesn’t mean forcing people into a single outcome or a retirement account that doesn’t require them to engage at any time in their lives. But it does mean actively steering them into appropriate retirement phase arrangements designed in their best interests, such as retirement income accounts when they stop working or significantly reducing their hours, and making it easier to opt out if they choose something different.
Super funds are not currently allowed to do this. As a result, too many people are dragged into retirement sitting on savings, paying taxes they no longer need to pay and missing out on the opportunity to turn their pension into tax-free income.
The extent of the problem is now clear. Laneway Analytics research commissioned by HESTA shows that in one year alone, nearly 1.8 million Australians missed out on an estimated $2.46 billion in retirement savings because they remained in savings when they qualified for tax-free retirement.
Moving into retirement earlier can increase a person’s total retirement income by up to 12 percent over time.
Unless changes are made to the system, this missed opportunity is expected to rise to more than $5 billion a year by 2030, affecting up to three million people, many of whom are Australia’s least financially secure retirees. This is not good enough.
As HESTA managing director Debby Blakey points out, this isn’t about people needing complex strategies or being pushed into higher-risk investments. This is about people not being able to access the benefits the system currently provides, including tax-free investment gains and tax-free income streams in retirement, largely because they don’t know how or aren’t confident enough to make the switch.
In this way, HESTA argues that this is a fix hiding in plain sight. Allow funds to actively help eligible members transition into retirement phase accounts and unlock the results the system was always designed to deliver.
HESTA’s membership base (mostly women working in caring roles, many with below-average balance) is the group most likely to be affected by these environments.
Under the proposal, funds will be able to encourage members to actively switch to retirement phase accounts when they are eligible, and automatically switch them only where one is inactive, with a clear and simple opt-out facility. This isn’t about locking people in. This is about ensuring that the default outcome is not accidental tax.
The modeling behind this is interesting. HESTA’s research shows that moving into retirement earlier can increase a person’s total retirement income by up to 12 percent, or $99,000, over time, compared to someone who delays the transition by just four years.
The biggest gains are seen among people with low balances, with balances between about $44,000 and $396,000, and especially women, who are more likely to have disrupted work histories, have less access to advice and experience a lot of fear.
Other countries are already moving in this direction. In the UK, this approach is described as offering “guided retirement journeys” or structured support to help people convert their retirement savings into income.
And where people make no active choices, funds are in the process of requiring fallback arrangements, called defaults, that direct their members to retirement income solutions designed to work for them.
Regulators in the UK are moving rapidly in this direction, with the expectation that schemes will navigate retirement pathways and introduce fallback solutions well before the end of this decade. Australia is left behind.
Independent analysts think the same failure is happening on the ground. Ian Fryer of Chant West, The Epic Retirement Tick’s review partner, has been unusually upfront about this.
As Fryer puts it: “There are many members over 65 who have stopped working and never intend to return to work, but who continue to pay 15 percent tax on their earnings rather than transfer them to a retirement account where they won’t pay any taxes. While some have their own reasons for doing so, most are just there because they don’t know any better.”
This is important because it dispels the idea that this is about bad personal choices. Most of the time, it’s about a system that requires too much information, too late in life, and doesn’t care if people freeze in fear.
In my view, it is time for Australian lawmakers to take three things seriously.
First, Australia needs better quality digital guidance that will remove the need for a person to mediate simple retirement decisions. People should be offered clear, well-designed online journeys by their super funds to help them understand the best situation for their retirement income, see how age pension fits in and adjust investment and income settings as they approach and progress towards retirement, reset their income annually and monitor their guardrails if returns change.
Most importantly, this guide should make the transition to retirement mechanisms much more seamless. People shouldn’t have to “apply” for retirement or open a separate account with paperwork and forms like they do today.
With the right guidance and support, they should be able to change their own circumstances and transition to retreat in a way that reflects their own circumstances and the advice given.
Second, funds need the regulatory-driven ability and expectation to create retirement products that suit different groups and to actively guide people to those options when appropriate.
Retirement doesn’t look the same for everyone, and the system shouldn’t act like it does. For lower balances, members may not need insured lifetime income streams, but higher balances may make sense. Additionally, there should be oversight on the product that suits the group, effectively stopping funds from creating lucrative products and shoehorning members into default.
Third, there needs to be a safety net (or pension default) for people who don’t work. If someone chooses not to engage at all despite guidance and explanation (and a fund proves actively trying), the system should be able to move them into a simple, basic retirement phase account designed to provide income and minimize the unnecessary taxes they pay. And of course, you need to have a clear ability to let go.
None of this eliminates the need for funds to provide real selection and good pre-retirement training. And this isn’t a call for a “lifetime account” that quietly locks people in so some funds can prevent outflows from poor pension services or poor performance.
Choice, transparency and the interests of consumers must come first.
Bec Wilson is the bestselling author How to Have an Epic Retirement and new releases Prime Time: 27 Lessons for the New Middle Life. Writes a weekly newsletter epicretirement.net and hosts prime time podcast.
- The advice given in this article is general in nature and is not intended to influence readers’ decisions about investments or financial products. They should always seek their own professional advice, taking into account their personal circumstances, before making any financial decisions.
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Bec Wilson is the author of How to Have an Epic Retirement and writes a weekly newsletter for pre- and post-retirees at epicretirement.net.
