Budget ignores Retirement Income Review suggestions

The Actuaries Institute says the government has failed to solve large and lingering issues related to retirement income and has basically ignored the Retirement Income Review (RIR) recommendations.

The government has axed the $450 superannuation guarantee threshold, reduced the eligible age for the downsizer contributions scheme and eased the work test for older Australians.

The First Home Super Saver cap has also been raised to $50,000 from $30,000 – allowing first-home buyers to make more voluntary contributions with their super fund to place towards a house deposit.

Read more: Federal government to assess superannuation, housing recommendations from Retirement Income Review

The $11.2 million funding boost for APRA’s work in regulating super funds has been welcomed, as has the $1.6 million boost for advocate group Super Consumers Australia.

Do these Budget initiatives solve Australia’s retirement income dilemma?

Not according to the Actuaries Institute, which commends these changes but says the government needs to solve remaining issues.

“The system also still lacks an overall objective for superannuation and its role in supporting retirement incomes,” said Actuaries Institute president Jefferson Gibbs.

“The institute urges the government to provide clarity on the purpose of superannuation, to enable more substantive reforms to be sensibly made to improve the system.”

Read more: Retirement Affordability Index May 2021

Can Australians ever be convinced to spend their superannuation capital to fund a better lifestyle in retirement rather than living only off the income generated and leaving the capital as a death benefit?

The next 20 to 30 years will see the biggest intergenerational wealth handover in history, according to research by the UK-based Institute of Fiscal Studies (IFS).

“The largest part of this great wealth transfer will be between members of the baby boomer generation (people born just after the end of World War II through to 1964) and their children and other heirs,” writes Vanguard’s senior personal finance writer Tony Kaye.

He adds that over the coming decades, at least $3.5 trillion of assets will be inherited in Australia, in the form of family homes, investment properties, superannuation, direct shares and other financial and non-financial assets.

The IFS found that 72 per cent of people born in the 1960s are expecting to receive an inheritance from their parents, rising to 81 per cent for those born in the 1980s.

It also found that average inheritances compared to lifetime income are likely to be almost twice as large for people born in the 1980s compared to those born in the 1960s.

It seems there is a long way to go to convince older Australians to look after themselves now rather than their children – even considering those generations will also have a working lifetime of compulsory superannuation contributions on top of ‘expected’ inheritances.

With the Budget changes to the Pension Loans Scheme (PLS), the government is trying to change the mindset about borrowing against the family home to fund a comfortable retirement.

But does it go far enough?

The changes certainly make the PLS more attractive for older homeowners, but more can be done, say UNSW Sydney experts.

Three new measures aimed at increasing the uptake of the PLS were introduced in the Budget, the most notable of which is the introduction of lump-sum payments.

“The lump-sum payments will increase the attractiveness of the Pension Loans Scheme for senior Australians by giving them the flexibility to pay for large one-off expenditures – such as replacing a car, to make home improvements or renovations, or to pay for aged care services,” say the experts.

The remaining measures include the introduction of a No Negative Equity Guarantee and a commitment to raise awareness of the PLS through improved public messaging and branding. 

UNSW says the government needs to do more to enhance interest in the PLS by describing the product in an easy-to-understand way “with a focus on how it can be used to enhance living standards in retirement”.

“It is encouraging that the government has committed resources to increase awareness of the Pension Loans Scheme,” say the group.

Other suggestions for making the PLS more attractive include lowering the loan interest rate, currently charged at 4.5 per cent annually and compounding each fortnight on the outstanding loan balance.

“This interest rate is lower than that of commercial reverse mortgages available in Australia but is higher than the mortgage rates for owner-occupied mortgages because no repayments are made until the loan is settled, which is typically when the person has passed away,” says UNSW.

The RIR stated that the focus of super is too often based on building larger balances through increased contributions.

“Insufficient attention had been paid [to] helping people optimise their retirement income through the efficient use of their savings in the superannuation to pension phase,” writes AFR columnist John Wasiliev.

“This might be because people were generally reluctant to draw down on their retirement savings amid a complex system.

“There is also a reluctance to consume ‘nest egg’ funds. Concerns about possible future health and aged care costs and perhaps outliving savings were cited as the main factors.

“Adding to these fears is the uncertainty of the COVID-19 impact.”

Big issues remain, says the institute, if the government is ever to make meaningful changes to the retirement income system.

“The system also still lacks an overall objective for superannuation and its role in supporting retirement incomes,” said Mr Gibbs.

Measures to help renters in retirement, particularly single female renters who are among those most at risk of poverty in retirement, still need to be considered and implemented, says Actuaries Institute chief Elayne Grace.

Read more: ‘Secret plan’ to force retirees to use their home to fund retirement

“Actuaries recognise that solutions require sustained and considered involvement across a broad range of stakeholders. But it is important we also get further commitment,” she said.

“Overall, the institute welcomes targeted spending that increases the wellbeing of all Australians and is particularly pleased to see a significant increase in spending on many important areas, including aged care, mental health and having a strong and fair National Disability Insurance Scheme.”

What more do you think could be done to improve retirement income? Why not share your thoughts and suggestions in the comments section below?

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Written by Leon Della Bosca

Leon Della Bosca has worked in publishing and media in one form or another for around 25 years. He's a voracious reader, word spinner and art, writing, design, painting, drawing, travel and photography enthusiast. You'll often find him roaming through galleries or exploring the streets of his beloved Melbourne and surrounding suburbs, sketchpad or notebook in hand, smiling.
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