Taking the long-term view on retirement income

Review highlights need for a secure a sustainable retirement income system.

House built out of Australia money

Research shows that even under a mature superannuation system decades from now, most Australians still won't have saved enough to meet their aged-care costs and will have retirement income well below the level needed for a comfortable standard of living.

The Committee for Sustainable Retirement Incomes (CSRI) carried out a comprehensive review of the retirement income system, building on the findings of the Murray, Cooper and Henry reviews. Using the collective thoughts and feedback from industry leaders, consumers, government and academics, the aim was to develop long-term policies that would result in adequate and sustainable retirement incomes for all.

Founder of the CSRI Patricia Pascuzzo outlines the findings of the review, what they mean for ordinary Australians and what needs to be done in the short-term to secure long-term security for retirees

Given the increasing cost of aged care and a rising rate of people going into aged care facilities, a more effective use of all household assets will need to be made to maintain an adequate living standard.

The most direct way of improving retirement outcomes for ordinary people is to efficiently convert superannuation balances into sustainable income streams. This means building on the strengths of the fully-funded defined contribution system with outcomes similar to a defined benefits system.

Australian households have more wealth tied up in housing than any other asset. There is a growing need to find a way to encourage pensioners to access the equity in their homes to improve their retirement incomes.

Currently, there are significant obstacles to accessing home equity. In fact, the current reverse mortgage market in Australia fails to support retirement income – most loans are lump sums not income – and the average loan size is small and costly in terms of interest. Australian retirees own over $900 billion in home equity yet only $3.5 billion has been accessed through the current equity release market.

It would be counter-productive to improving adequacy if any funds released in this way were included in the Age Pension means test while housing is exempt. The value of the home is no different from any other asset and, in principle; it should be included in the Age Pension means test. 

The difficulty is how to create a model where pensioners can access their home equity without reducing their cash income, especially as some pensioners own high value homes but are income poor. In order to effectively tap this home equity, the exemption limit below which home equity would not be subject to the means test would need to be set reasonably high: to ensure that no pensioner suffers a loss of cash income. This means that there should be enough equity remaining in the property to finance the release of equity and meet the requirements for accessing residential aged care in the future.

Providing an exemption to the $1.6m cap that can be transferred to the pension phase for people downsizing the family home does nothing to assist those retirees who are most in need. 

Helping retirees tap the equity in their homes is a critical element of making Australia’s retirement income system more sustainable. But it is just one piece of the puzzle.

More guidance needed for super members at retirement

The Government is developing a framework for the pensions phase, drawing on the work of the 2014 Financial System Inquiry to promote ‘Comprehensive Income Products in Retirement’ (CIPRs). CIPRs are intended to offer more security by managing risks more efficiently through pooling funds, thereby offering higher retirement incomes.

Engagement by the Committee for Sustainable Retirement Incomes suggests that firmer guidance is needed to help super members at retirement. This would involve a system of ‘guided choices’ where the CIPRs offered by superannuation funds are pre-selected according to broad categories of members (age, gender, accumulation balance, age pension entitlement, and ability to access other savings).

Such guidance would preferably start from no later than age 50, involving iterative engagement with members as they consider when they intend to retire (or transition to retirement), and whether to vary their voluntary contributions to achieve their target retirement income. The approach recognises that most retirees do not seek personal financial planning advice and that this is not going to change quickly.

There are many challenges here, not only about product design but also about the obligations of trustees, and protections for trustees, the regulatory requirements for the product offers, and the degree of compulsion on funds to offer them. The process will only work well if tax and transfer settings in retirement complement the arrangements for superannuation in the accumulation phase, and are sufficiently stable for the purposes of planning and for decision-making at retirement.

Read the full report: CSRI Sustainable Retirement Income Integrated Reform Programme

 Patricia Pascuzzo is the Managing Director and Founder of the Committee for Sustainable Retirement Incomes. 

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    COMMENTS

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    Travelling Man
    12th Jun 2017
    11:25am
    Be assured of one certain event, Pattie. Any government which attempts to place the family home part of the Age Pension means test will enjoy a permanent residence on the Opposition benches. As well, retirees can read economic and financial news and updates on their computer screens and in the press business sections as well as any one else and thus do not need any advice from personal planning parasites with their rorting agendas.
    Nan Norma
    12th Jun 2017
    11:35am
    I'm with you Travelling man.
    Tib
    12th Jun 2017
    11:56am
    Completely agree. Personal planning parasites, doesn't seem adequate to describe my low opinion of these people. Also selling the family home doesn't seem a good idea when the government has allowed the retirement village industry to gouge and steal every dollar you own.
    So no I don't think things will change soon unless the government gets their act together. Since we are Speaking of parasites.
    GeorgeM
    12th Jun 2017
    1:27pm
    Agree, Travelling Man. Their forum's recommendations clearly show the vested interests of Super Funds who want to get their hands on more money, and their FPs (parasites).

    Instead, it would be much simpler, avoid complexities, reduce Centrelink costs, and be fair to all if they simply paid Aged Pensions to all who have paid taxes here for say 20 years (including husband / wife as contributors), and tax all income above that, with NO Assets or Income Tests. Then, those who want will downsize IF THEY CHOOSE TO without any impact on their pension income.

    However, the moron politicians will not do the above, and these Consultant forums will not recommend it as THEY don't benefit. So, the only option left is to VOTE OUT ALL SITTING POLITICIANS as they don't act in our interests. Note that the retirees / soon-to-be-retirees group is a very large group and can make this happen especially in all marginal seats.

    Suggestion: In view of the preferential voting system, after voting one for a "retiree supporting candidate", the next preference should go to the candidate most likely to challenge the favoured candidate, and the last to the sitting candidate - to make sure the latter loses. That should get rid of all sitting leeches with their fat pensions, and prevent further MPs getting their bloated pension ENTITLEMENTS, then maybe they will start listening.
    Eddy
    12th Jun 2017
    12:04pm
    Travelling Man, I would not be so certain the putting the family home into the assets test will consign the offending political party onto the opposition benches, either temporarily or permanently. While retirees do represent a large voting block they are not united, not all retirees are home owners and retirees are outnumbered by non-retirees. The political rule-of-thumb on Australian voting patterns is that about 40% always vote liberal and 40% always vote labour, irrespective of policies. The remaining 20% are the swinging voters who will bring down a government. Then of course, there is some possibly of bi-partisan support for an appropriate package of reforms to OAP arrangements; both major parties are aware of the potential financial difficulties in the near future of too many recipients and too few taxpayers.
    If you look at myself for instance, I am a retiree but I fail the income test so whether or not the family home is included inn the assets test is immaterial to me.
    TREBOR
    14th Jun 2017
    10:04pm
    "If you look at myself for instance, I am a retiree but I fail the income test so whether or not the family home is included inn the assets test is immaterial to me. "

    Thank you for your comment.. now..., let's move on.
    Trees
    12th Jun 2017
    12:08pm
    Independent financial advise from 50 on wards is a very good idea, the sooner you start planning the better off you will be, no good getting to retirement age finding out its not good news. Financial advise is not that expensive & no matter how much you read & you think you are doing the right thing for your future advisers can present you with better options - Like my Dad said it never hurts to listen to advise, you don't have to take it but you might learn something.
    Tib
    12th Jun 2017
    1:01pm
    The problem is getting good advice. Most financial advice on offer is very poor quality and the ongoing charges for this advice is very very high so I don't know where you get the idea that advice is not expensive. I think you haven't been reading the fine print or have no idea what the real cost of the advice has been.
    Tib
    12th Jun 2017
    1:17pm
    One of the ways financial advisers make money is by getting you into a very high cost super fund. Read this.
    http://www.abc.net.au/news/2017-06-09/superannuation-has-cost-australians-24230b-over-the-last-decade/8606362
    fred
    12th Jun 2017
    4:45pm
    many financila advisors charge 1 % of your hard earned assets invested for their commission aka fees and that is every year whether you make money or lose or breakeven, They are vultures and parasites . its your money and I suggest there is enough info out there to help you make sensible decisions noe 1 % of halh mill assests is $5,000 each and every year and it comes straight off the top
    TREBOR
    12th Jun 2017
    9:12pm
    CommBank financial advisors spring to mind....... man the parapets!!
    Retired Knowall
    13th Jun 2017
    5:25pm
    ADVICE
    floss
    12th Jun 2017
    2:03pm
    Sorry but can you trust any suggestions made by this Federal Government. Knowledge is power so educate your self as no one looks after your money more than you.Good comment George.
    TREBOR
    12th Jun 2017
    9:15pm
    Can't trust their 'opposition', either. That's why I call them The Tag Team.
    GeorgeM
    14th Jun 2017
    1:17pm
    Thanks, floss. Some great comments from TREBOR below as well.
    ex PS
    16th Jun 2017
    3:52pm
    The only sure thing is that this government will strip Retirees of Assets in order to deliver Tax cuts to the wealthy. It is the price they have to pay for their support.

    12th Jun 2017
    4:53pm
    Don't you just love it when "experts" do workshops and then tell us retirees what is best for us? I just love the bit about using the collective thoughts and feedback from industry leaders, consumers, government and academics. Can we presume that consumers means retirees? I certainly hope we got a chance to put forward some ideas from the real world. Industry leaders are probably the superannuation industry with a vested interest, governments have a jaundiced view as spending too much might jeopardise their chances or re-election and as to the green leaning academics with their "models", I could care less.
    TREBOR
    12th Jun 2017
    9:15pm
    I just said elsewhere that if academics were so right, this nation would run like a Swiss watch... it obviously doesn't despite the input of countless 'experts' to governance here.

    As for the rest... them is what's called 'cronies', me old chum!

    Any 'consumer' who advocates (as Old Geezer does) including the family home is not a genuine consumer.... they probably are 'gifted' their residence in their mansion as a business arrangement with their own companies.....

    I see no reason to drastically alter the rules on the family home etc... other than to do as I've stated many times, and have re-stated below.
    GeorgeM
    14th Jun 2017
    1:20pm
    Damn right, Old Man, not one dollar of any Govt (our) money should be spent on reports by so-called self-centred vested interest groups such as those represented in this study. It is time for action, as I have indicated in my earlier comments above, by retirees.
    ex PS
    16th Jun 2017
    3:55pm
    Whenever governments commission reports they make sure that the consultant knows ahead of time what the outcome should be. Don't meet the outcome and you will get no further business.
    I know because I have been part of the process.
    TREBOR
    12th Jun 2017
    9:09pm
    Wrong. Put retirement packing for all under one roof far away from the hands of grasping politicians and their cronies, with an elected board which must include at least one SFR and one pensioner out of a total of five, and deal with all on the same basis and by the same values in accordance with contribution, always ensure a valid minimum (there are people who will never work and contribute for countless reasons), and tax all income, gifting and and benefits over and above that at the going income tax rate.

    'access equity in their housing'... bullshit!
    TREBOR
    12th Jun 2017
    9:18pm
    I'm open to suggestions on this scheme..... composition of the board may be up for change.... maybe we need an OAP and a DSP person plus an SFR... out of five... might get some sense that way....
    Anonymous
    12th Jun 2017
    10:42pm
    TREBOR, I believe that the main reason people are not taking up reverse mortgages is that they are too expensive. Remember, they rely on house values continuing to climb and the interest is compounded. Each time interest is added to the loan, it becomes principal and is also subject to an interest charge.
    TREBOR
    12th Jun 2017
    10:57pm
    Indeed - your capital on the loan doubles in about eight years.... you need to look carefully at what you are dealing with in many ways, including how long you expect to be here. It trebles in 11 years and quadruples in about 14, from figures I've done in the past.

    So if you're 66 and take - say 25% of value - say again... $200k (which will affect pension etc instantly), by age 79 (if you make it that far) you will owe around $800k... after that it gets worse, and while you may say that won't affect you when you're gone....

    Well - I'd rather my lovely grand-children get value from it. I didn't do all the things I've done to spend it so that my children and grand-children could become peasants in their own country.
    TREBOR
    12th Jun 2017
    10:59pm
    To me, this is just another way for the banks to get hold of what you've already paid them through the nose for... and spare the government the cost of funding your retirement.

    A win-win for them - a lose-lose for your future generations.

    And they dare talk about 'generational debt' - what about deliberately engineering generational poverty and hardship to own a roof over one's head?
    TREBOR
    12th Jun 2017
    11:02pm
    (I do go on at times) - if you like, you can look at it like this:-

    The Axis of Government and Banking intends to ensure that you are born with nothing and will die with nothing, and all you will do along the way is feather their nests.

    I think I reject that proposition, here and now.
    Anonymous
    12th Jun 2017
    11:08pm
    The cost depends on the interest rate TREBOR and on today's rates I doubt that the loan balance would double in 8 years. To do that would suggest an interest rate of 9%. There is a rough rule of thumb that involves dividing the interest rate into 72 with the result being the number of years to double the debt. Should rates rise to those we endured of 18% the debt would double each 4 years and that means that the original debt would quadruple in 8 years. Who wants to take that risk?
    Anonymous
    12th Jun 2017
    11:10pm
    I was born with nothing TREBOR and I have most of it left.
    TREBOR
    12th Jun 2017
    11:20pm
    That's what I'm saying - the Plan is to ensure you dissolve all your assets in retirement unless you are a favoured species, and will part this earth with nothing.

    So the end result of all this manipulation of pensions and such will be a massively divided society that will one day find itself in a civil war between those who are of the privileged classes and those who are not, or we will see Hunger Games for real....... or its equivalent.

    So much for a century of social advance in Australia.

    Oh - I get your meaning... well said......
    TREBOR
    13th Jun 2017
    12:34am
    It's compound interest and there is an annual fee as well, which goes into the debt and compounds the interest ... I did figures on this a long time ago and came up with those numbers... the only possible difference today would be the actual starting interest rate....

    Damn - I've become one of those numbah crunchahs I so despise.

    https://www.canstar.com.au/home-loans/reverse-mortgages/reverse-mortgage-interest-rates-and-fees/

    Look at the annual compound interest including the fees, and it goes way out of control... Houston we've had a problem.... that fee adds a substantial amount to the compound interest over time, same as any fee attached by a bank to a loan.
    TREBOR
    12th Jun 2017
    10:52pm
    http://www.industrysuperaustralia.com/campaigns/the-superannuation-opportunity/speakers/patricia-pascuzzo/
    TREBOR
    14th Jun 2017
    10:06pm
    Now there's a nice girl, Pattie.. go home and do what you do best.... we'll call you when we need you.

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