Innovative plan to ensure income for life

Worried about running out of money? This concept could ensure income for life.

retired couple walking along a beach

How your super is treated once you die has been scrutinised by the Actuaries Institute in its Retirement Income Review submission, along with a number of other shortfalls and inconsistencies in Australia’s retirement system.

The institute’s submission notes that when a person dies, the residual balance of his or her superannuation averages around one quarter to one third of the starting balance.

“This leakage to beneficiaries is an inefficiency of our superannuation system,” the institute wrote.

“Retirees can potentially achieve a higher standard of living if their entire superannuation balance is used to provide retirement income.”

According to the institute, there is a “real risk” that the Age Pension combined with an individual’s superannuation savings may not be sufficient to provide an adequate retirement income due to a combination of factors.

“These could include low contributions, insufficient investment returns, a reluctance to spend or because people live too long, outlasting their money,” it says.

Therefore, the group advocates the use of pooled products to offset longevity risk and ensure income for life. But such products are largely missing from the current retirement environment.

“At retirement, superannuation assets are not efficiently converted into retirement incomes due to a lack of risk pooling and over-reliance on account-based pensions,” it wrote.

The institute explains the problems of not pooling longevity risk.

“Consider 100 females who all retire at the same time at age 65. They all want a superannuation income of $10,000 per annum and to feel approximately certain that their savings can last as long as they live,” it says.

According to the institute, each female has a six per cent chance of living to 100. If they each want to be 94 per cent confident that their income can last for life, they need to ensure their income will last to age 100.

Assuming a zero per cent return on any investments, each would need $350,000 in savings at age 65. That’s $35,000,000 for the group.

Using Australian Life Tables (2015-17), 86 of the 100 females would live to age 80, 75 would live to age 85, 55 would live to age 90 and 26 would live to age 95.

So, if they work together as a group and pool their resources, each of the 100 females would need only $249,300 at age 65; therefore, to ensure their savings lasted a lifetime, the pool would only need to be $24,930,000.”

According to this and other modelling, retirement incomes could increase by around 15 to 30 per cent by combining an account-based pension with products that insure longevity risk, allowing retirees to “spend with confidence”.

“Pooling has the same effect as each person saving an additional 40 per cent in retirement savings,” says the institute.

However, it does acknowledge that this is simplified example of pooling and that, along with basis risk and the chance that lifetimes are shorter than assumed, there are downsides to such thinking.

“The downside is that when they invest, they are fully committing their savings towards the need for lifetime income.”

The institute says Australians need to develop a better understanding of retirement income policies and how much money they can expect to get in retirement.

“There is little evidence on the adequacy of retirement income in Australia because of a lack of good quality data,” the institute says. “Australians tend to underspend in retirement for fear they will outlive their money. Some retirees are net savers. But a lack of data means it is difficult to know if retirees have an adequate level of income.”

What do you think of the concept of pooling for longevity?

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COMMENTS

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Julian
28th Feb 2020
10:28am
What a great idea...for communists.
LFC
28th Feb 2020
12:05pm
Agree
Macheke
2nd Mar 2020
6:16am
Do you insure anything? Do you rely on medical cover or medicare? Risk sharing is a basic economic concept.
Sundays
28th Feb 2020
10:45am
So if you die young, your money stays in the pool for others. I would want a great pension indexed annually.
Mariner
28th Feb 2020
1:32pm
That is very similar to the pension system in my old country, Switzerland. When one dies young one gets nothing and if one gets to 100 one has no problems, the money is available. My mother got $800 a week till she died last year at 95. Would not be popular here in Australia as there are no provision for kids' inheritances like in our superannuation. You get an equal share as long as you live, no means or income tests. Mum filed her last tax return at 94, pension payment included.
Rae
29th Feb 2020
9:51am
Exactly how the old defined benefit funds work. You save like crazy, pay full tax and hope you live a while after receiving the income stream because it's lost to you once you take the regular income option.

In Australia the means test deems the income as only 10% taxed regardless of the actual real amounts which is normally around 45%. It's a rip off and I was amazed the Greens voted for it in Hockey's budget.
pedro the swift
28th Feb 2020
11:14am
What a great Idea. When everyone in the pool dies, the government gets it all. Also make it easier for gov. to get their hands on it,fewer hassles to deal with pooled resources than individuals.
Circum
28th Feb 2020
3:26pm
Vote 1 for Pedro to be our next treasurer.
Circum
28th Feb 2020
3:26pm
Vote 1 for Pedro to be our next treasurer.
Macheke
2nd Mar 2020
6:17am
This is not necessarily a government initiative. Life annuities work like this but see my comments on fees and investment returns.
Horace Cope
28th Feb 2020
11:28am
There used to be terminating building societies with a notional term of 26 years which worked on the basis of all borrowers lasting the distance. As the average age of home ownership in NSW is about 7 years, a lot of the borrowers paid their loan out early and this had the effect of reducing the term of those borrowers remaining. I had a friend who was the last man standing and was advised by the building society that his loan was repaid 8 years early because all of the other borrowers had left.

What has this to do with super you ask? Well, the funds remaining in the pool after each member dies should be adjusted to show an increase in super for the remaining members with the last woman standing copping the balance for her estate to disperse.
Blinky
28th Feb 2020
11:57am
Where do you get these so-called "experts" from? Hopefully, no one will listen to them!
Macheke
2nd Mar 2020
6:18am
Do you insure anything? Do you rely on medical cover or medicare? Risk sharing is a basic economic concept.
Viking
28th Feb 2020
4:15pm
This might be a good idea for women assuming they live longer than their spouses but if they don't their husbands miss out. If I go first my remaining super goes to my wife to make sure she is financially okay after my departure. If it was pooled she would be left with far less. We have our super split between us, both reverting to who ever is remaining. If we were both in pooled funds we'd both miss out. This might suit single people but few couples.
Farside
28th Feb 2020
5:35pm
isn't pooling risk what insurance companies are for? Sportsbet anyone?
Spartan
28th Feb 2020
6:07pm
Isn't this effectively how annuities work, a set income for life from a managed pooled resource? So what's new about this idea?
If bigger contributors die young does this mean the smaller remaining contributors win the jackpot?
Franky
29th Feb 2020
10:10am
That was my first thought too, hmmm
Circum
28th Feb 2020
7:15pm
I would like to see what the administration costs would be before forming an opinion.
Macheke
2nd Mar 2020
6:20am
Exactly!
Circum
28th Feb 2020
7:15pm
I would like to see what the administration costs would be before forming an opinion.
andytwo
28th Feb 2020
10:02pm
The system already exists, it is called the PSS. I recently received a pension rise from the above, $2.60, the Honourable Centrelink butted in and between them I ended up with only $1.35 f/n rise. And you can't access the principle.
Sundays
29th Feb 2020
9:33am
True, no residual capital but that’s why Centrelink doesn’t count 10% of your PSS in the income test. If you have a spouse they do receive a 67% reversionary benefit with the PSS which would not happen under this scheme. PSS plus part age pension, you’re a winner! No vagaries of the market and guaranteed fortnightly amount indexed for life.
Rae
29th Feb 2020
9:55am
Considering the cost of these income streams in fully taxed savings it is no real win Sunday. It's beauty is in the reliability alone. No other super member pays full tax on contributions, has all that non concessional deemed just 10% and didn't get the 9% super guarantee like other workers.
Rae
29th Feb 2020
9:47am
It sounds like the whole of life income products of decades ago. I signed up for one supposedly paying me out $80 000 at age 60 but due to market conditions only produced $23 000. It seems the disconnect between fund predictions and reality is pretty big.
Anyone can promise nice results but delivering is very difficult. Especially considering the billions it costs to actually run all these funds. That's a whole lot of our savings gone right there.
Macheke
2nd Mar 2020
6:21am
Yes fees critical issue. The other is investment returns. Compounding interest is a powerful force over time.
old frt
29th Feb 2020
11:17am
Makes you want stop saving ang and let someone else keep kicking the savings can down the road. True Mondo I too thought this was going to a spiel for annuities and as we know their is only one winner with annuities and it is not any of the policy holders.
Macheke
2nd Mar 2020
6:14am
Pooling is an excellent concept. The issue is that the investment returns need to be attractive and the costs and profit margins of the product "low" otherwise the benefits of pooling are offset by the lower net return. In the example if the women can earn 4% pa more than the return (after fees, profit margins) of the longevity product, they will be able to match the income for life and hand back the full capital to their heirs. A lower differential will still see the vast majority better off. So the fees and the investment policy of the longevity product are critical.


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