‘Middle Australians’ missing out on their best possible retirement

smiling middle aged couple on bicycles

Are you an ‘in-betweener’? One of those Australians who aren’t super wealthy but wealthy enough to not be eligible for the Age Pension? The Actuaries Institute refers to this demographic as ‘middle Australia’ and believes those who belong to it should reconsider their retirement income strategies.

Ahead of legislative changes that will come into effect on 1 July, the institute has produced a report, A Framework to Maximise Retirement Income, that encourages in-betweeners to switch from account-based pensions to annuities.

The Retirement Income Covenant legislation, which takes effect from 1 July, has been introduced to the Superannuation Industry Supervision Act 1993 and, according to the Australian Prudential Regulation Authority (APRA), is an “important step in broadening industry focus beyond the accumulation phase to advance the decumulation, or retirement, phase of superannuation, and in encouraging RSE (registrable superannuation entity) licensees to innovate to improve outcomes for their members in retirement”.

Read: Retirees to benefit from superannuation changes

The authors of the Actuaries Institute report, Jim Hennington and Andrew Boal, observed that the ‘middle Australia’ cohort has sufficient retirement savings to support a significantly higher lifestyle than the Age Pension on its own. However, many in this group adopt a very conservative approach to spending in their earlier retirement years for ‘fear’ of living longer than expected and not having enough an income in those later years.

In an interview on Professional Planner, Mr Boal, an actuarial consulting partner at Deloitte, says that using low-risk products as the basis of a retirement income plan would “flip the script”.

“Rather than starting with the status quo of an account-based pension, let’s flip it and start with an inflation-linked annuity.”

Read: Advocacy group calls for cap on superannuation balances

Such annuities, Mr Boal says, are a “risk free” way to fund a retirement, which makes it the perfect retirement foundation. Retirees could then look at options for longevity or investment risk (account-based products) if it fits in with their individual circumstances.

Mr Boal says that an annuity-account-based combination would give retirees a guaranteed lifetime income that would allow them to draw down more funds early in retirement than most currently do.

This sounds like a sensible and attractive path, but for many Australians the complexity of products currently available to them leaves many filing such plans in the ‘too hard’ basket.

Read: Difference between annuities and account-based pensions

Simplifying some aspects could perhaps be incorporated into RSE licensees’ response to the new legislation, which will require them “to formulate a retirement income strategy and publish a summary of the strategy on the superannuation entity’s website by 1 July 2022”.

Given that there are around 5.4 million Australians aged between 55 and 75, and that number is expected to grow significantly over the next 20 years, providing simplified access to annuities would seem a logical step, especially when considering research published in December that found only 40 per cent of people expect a comfortable retirement.

Giving ‘in-betweeners’ the confidence to spend more of their money early on in their retirement, as Mr Boal indicates annuity products would do, could help shift that attitude.

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Written by Andrew Gigacz

Andrew has developed knowledge of the retirement landscape, including retirement income and government entitlements, as well as issues affecting older Australians moving into or living in retirement. He's an accomplished writer with a passion for health and human stories.

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