Superannuation in the post-retirement phase

As 5.5 million baby-boomers approach retirement focus is shifting to how superannuation savings are transformed into retirement income. Recognising that many retirees do not have an adequate level of financial literacy to make optimal decisions about how to do this, the Financial System Inquiry recommended superannuation funds trustees should be required to pre-select a retirement income product for their members. This product should include a regular and stable income stream, longevity risk management, and flexibility. This report models the retirement income of six representative cohorts from a combination of income stream products and the Age Pension. A default retirement income product is a good idea but will be difficult to implement. Selecting the right product requires a thorough knowledge of retirees’ superannuation balances, other assets, any debts and their income needs in retirement. Superannuation trustees will need to understand the demographics of their funds’ members very well, and funds with diverse memberships may choose to offer more than one ‘default’ income product. Superannuation trustees need to understand that the Age Pension will provide a large proportion of the income of many retirees. For retirees with low superannuation balances (and few other assets) the Age Pension acts as an annuity – offering an income guaranteed against market risk, inflation risk or longevity risk. For these retirees the most appropriate options seems to be converting their superannuation savings to an account-based pension. Retirees with higher superannuation balances are likely to receive less (or zero) income from the Age Pension and may therefore choose to invest a portion of their superannuation savings into an annuity product to help manage their financial risk. Maintaining the flexibility to access capital is important, particularly in order to deal with unexpected health-care expenses. Even retirees with relatively low superannuation balances can receive an adequate income through their retirement from a combination of income-stream products and the Age Pension. Many, however, will need guidance about the best income products to use and how to draw down income through their retirement. Superannuation funds can take an active role in providing this guidance. This begins with communicating to members who are still in the accumulation phase about the retirement income they might expect. Informed members may choose to increase their superannuation contributions to meet their desired lifestyle in retirement. This guidance should continue through retirement as many retirees are unsure about how to drawdown their income to achieve an adequate quality of life while retaining some capital to cover unexpected costs. Home ownership is an important determinant of financial wellbeing in retirement as rental costs for non-homeowners are largely unmet by welfare payments. This has important implications as home ownership rates are expected to decline among future cohorts of retirees