Advice in retirement as a universally agreed goal

The government’s intergenerational report recently revealed that total assets in the superannuation system are expected to continue to grow strongly over the next four decades, reaching approximately 218 per cent of GDP by 2062–63, compared to 116 per cent during 2022–23.

On the other hand, superannuation tax concessions are projected to rise substantially as a proportion of GDP – from about 1.9 per cent in 2022–23 to 2.4 per cent in 2062–63. Interestingly, these tax concessions are anticipated to surpass expenditures on the age pension sometime during the 2040s.

But the government is concerned that Aussie retirees are hoarding their super, which it says goes against the objective of the super system – one that is yet to be legislated.

In fact, recent research from the Financial Services Council (FSC) showed that retirees in Australia are currently drawing down 17 per cent less income in their retirement from their superannuation than what is optimal.

Boosting this, according to the FSC, would support a federal budget that is running a 2 per cent structural deficit over the medium-term, without the need for “punitive and unfair new taxes”.

As such, the FSC called on a range of reforms such as “making financial advice more affordable”.

“One action the government is already considering is ensuring Australians can access high-quality and affordable financial advice,” it said.

“FSC analysis has shown that whilst Australian households are among the wealthiest in the world, far too many Australian consumers score poorly on measures of financial literacy, challenging the complex decisions they must make when they retire with considerable superannuation savings.”

The FSC added that implementing the Quality of Advice Review “will help Australians access the financial advice that will make retirement planning more efficient”. This, it noted, would result in 100,000 more retirees drawing down an extra $10,000 each in increased retirement incomes every year.

ifa understands that Treasury is now expected to release a consultation paper to strengthen the accessibility of retirement products.

The government’s paper, according to Treasurer Jim Chalmers, will also canvass problems with financial advice.

“Half of retirees draw down the minimum and, on average, people who draw down the minimum will still have about a quarter of their super remaining when they pass on,” Dr Chalmers said on a roundtable hosted by The Australian Financial Review in August.

“What that really means is people are living more frugally than they need to. There’s not enough confidence in their balances, there’s not enough diversity or flexibility in products in the market or literacy or advice or strategies to match people with these products.”

Financial literacy key to fostering confidence

Wattle Partners director Drew Meredith says that a lack of financial literacy and education is definitely contributing to most retirees not wanting to spend their superannuation.

“The financial services and superannuation sector has been focused almost solely on investment and supporting the growth of accumulators who are entering or part of the workforce,” he says.

“There has been limited, if any, investment into education on retirement, outside of a few resources, which means the basic understanding of superannuation for most Australians, let alone retirees, is very low.

“The lack of education and understanding has meant that many entering retirement simply have no idea how long their capital will last, nor how much they can reasonably spend without having a major impact on this.

“The result is a default to what the government says is an ‘appropriate’ amount, which in reality, is aimed at ensuring super balances are reduced to zero in someone’s 90s.

“Put simply, most retirees aren’t empowered or informed enough to know how much they can really spend.”

Ageing population hurting growth

As part of the intergenerational report, the Treasurer also revealed that the number of Australians aged 85 and over is expected to more than triple over the next 40 years, while the number of people aged 65 and over is tipped to more than double.

As such, among the key spending pressures in the future will be aged care and health spending.

Economist Shane Oliver says that as a direct result, government spending as a share of GDP will rise from 24.8 per cent in 2022–23 to 28.6 per cent in 40 years’ time, which is well above its pre-pandemic average.

“All things equal, a bigger government share of GDP means a less productive economy,” AMP’s chief economist says.

“It may seem academic and hard to comprehend, but the now projected 1.2 per cent p.a. growth in productivity will mean that GDP per person in 40 years’ time will be 11.2 per cent lower than if productivity ran at the previous projected level of 1.5 per cent p.a. If productivity growth is in line with the average of the last decade of just 0.8 per cent, per capita GDP will be 24.2 per cent lower than otherwise in 40 years’ time,” Dr Oliver explains.

But besides a growing need for care and health services, the pool of Aussies retiring each year will also need financial advice, especially if the government plans to incentivise them to spend their super and in abundance.

Commenting on the government’s intention to probe Aussies’ unwillingness to cash out their super, chief executive officer of the FSC, Blake Briggs, says: “Eight hundred Australians are retiring every day, and the government is right to prioritise action to make sure these consumers can choose from a range of products consistent with superannuation’s promise of delivering income for a dignified retirement.

“The retirement income covenant requires superannuation funds to formulate strategies to optimise retirement outcomes for members, however, the FSC believes this framework will be more successful if the government removes regulatory barriers that are inconsistent with the covenant.”

Speaking to ifa, the CEO of the Financial Advice Association Australia (FAAA), Sarah Abood, said the FAAA awaits “with interest” the consultation paper on retirement and expects to be “very involved” in this consultation.

“We believe it is critically important for those approaching, or in retirement, to have access to high-quality financial advice which goes well beyond just choosing from a range of product options that best suit their personal retirement needs,” Ms Abood said.

“Access to financial advice is important in providing confidence about how to budget for expenditure and how to most effectively utilise all the resources that they have, including any social security benefits. Advice is essential to develop a longer-term plan for spending that ensures Australians can enjoy their well-earned retirement and addresses the fear of spending too much in their early years and having nothing left in their later years.

“Of course, estate planning is also critical in this context. Having a retirement plan, and an adviser to call upon, provides confidence, security, and ultimately leads to a happier and more successful retirement.”

Not one and the same

Contrary to the government’s super hoarders narrative, Neil Macdonald, chief executive officer at The Advisers Association (TAA), stresses that it’s important to recognise that retirees are not a homogenous group.

While compulsory superannuation has been in place since the 1990s, the contribution rate at the beginning was just 3 per cent, which, he says, means that the complete benefits have not yet been fully realised.

“The average Australian is still retiring on about $300,000, which is not enough to be fully self-funded. Many fall into the middle, where they are not entitled to a full pension, but do not have enough to be fully self-funded – this is the group that needs the most help. At the other end are those with over $3 million who are already being targeted by the government, via changes to tax treatment of large balances,” Mr Macdonald says to ifa.

“It’s also worth noting many consumers don’t have a plan for their retirement other than retiring when they are 67 and unfortunately, in many cases, early retirement is forced on them due to ill health or loss of work.”

He does, however, admit that advisers do play a big part in ensuring Aussies retire well.

“Life expectancy has increased over recent years and many consumers may not realise that they could live past 90 and even into their hundreds,” he says.

There are many ways in which advisers can help, Mr Macdonald points out, including by ensuring their clients accumulate funds inside and outside of super “to let them choose when, and how, to retire”.

Advisers can also manage their clients’ investments in retirement, Mr Macdonald says.

“With longer life expectancy, we are seeing more bucketing strategies, where 2–3 years of funds are held in cash, and then a combination of longer-term, higher-returning and income-producing assets,” he says.

Mr Macdonald also highlights that individuals who are already clients of advisers tend to approach retirement with greater confidence. This stems from their prior experience, where they have observed the positive outcomes of advisers assisting them in making informed choices and trade-offs to amass the necessary retirement funds.

“That assumes the adviser educates the client that they are able to assist with retirement as well as the accumulation phase,” he adds.

Important role

Ultimately, Mr Macdonald notes, moving forward, advisers will play an important role in Australia.

“The implementation of the Quality of Advice Review recommendations will make it easier for advisers to provide scoped advice to consumers in a cost-effective way. Other changes that we have asked for include giving advisers access to Centrelink and ATO data, which would speed up the process for everyone,” he explains.

“Advisers can help consumers understand the different types of products and solutions available, as well as their benefits and disadvantages.

“With the retirement income covenant, trustees and product providers are and will be developing innovative new products and solutions. Some of them are quite complex – advisers are well-placed to explain them to clients and make these more contemporary products and solutions more accessible to more Australians.

“Leading up to retirement, an adviser can also help clients understand their options and make the right trade-offs between government pensions, Centrelink requirements, and different types of products and solutions available,” Mr Macdonald concludes.

Also speaking with ifa, Eugene Ardino, CEO of Lifespan Financial Planning, says that he too is eager to review the government’s announced consultation paper. He hopes it will provide the advice community with insights into the government’s perspective on retirement products and their accessibility.

“I feel advisers play an integral part in helping Australians plan their retirement when given the opportunity, which includes helping them decide where to spend their retirement savings and what products to buy,” Mr Ardino says.

“While, obtaining advice is obviously more effective for consumers if they access it long before retirement, having an adviser to navigate trying to decide which retirement products best suit an individual’s unique circumstances will also play a large part in the effectiveness of any new framework that is built.”

Therefore, he notes, ensuring access to personal advice for consumers interested in acquiring new retirement products is crucial. That way, they can thoroughly evaluate the suitability of such products for their needs.

“I also feel that it is imperative that this advice be accessed from an adviser not related to the product provider, which is particularly important for new, and perhaps, untested products,” Mr Ardino says.

“As such, I feel that this creates an even larger need for personal advice from a fully qualified adviser to become more accessible for all Australians.”

Verdict

Data from the ATO has painted a more sombre picture of the Australian retirement landscape.

Namely, figures that reflect on the years between 2014 and 2018 have shown that 80 per cent of people aged 60 and over who died in that period had no super at all four years before their death.

For those aged 80 and over, 90 per cent had no super in the four-year period before their death.

Speaking at an Australia-Israel Chamber of Commerce event in August, Deanne Stewart, CEO at Aware Super, said the narrative that Aussies are essentially dying rich is based on “a lot of myths”.

“I think we need to have a very data-based conversation when we’re starting to talk about what’s the next range of innovative solutions,” Ms Stewart said.

She did, however, agree that “a lot of fear” exists among Aussies nearing or in retirement.

This, she noted, is due to a deep lack of understanding of the super system which is exasperated by its complexity.

But regardless of what side of the debate they are on, all stakeholders agree on one thing – that advice in retirement is crucial.

As such, ensuring those nearing or in retirement receive the right guidance and financial help emerges as a universally agreed goal.