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Commentary on Retirement in Australia

QSuper launches an Innovative Pension Product - May 1, 2021

QSuper is to be applauded for launching perhaps the most innovative approach yet to meeting a key recommendation of the Financial System Inquiry of 2014 (!) calling for a Comprehensive Income Product for Retirement (CIPR).

As we repeatedly mention throughout the website, perhaps the greatest failing or superannuation is to provide certainty around income in retirement with the result that individual retirees often spend less and save more than would be optimal, with too much capital being retained and unspent in superannuation funds.

We provide a short summary of QSuper's new product, called their "Lifetime Pension", below but stress that professional advice should be sought prior to any commitment to this or any other product which, for all its potential benefits, still means that some or all of your funds are locked away or committed for the rest of your life. Regardless, you should take the time to read in detail the product description statement (PDS) to which we provide a link at the bottom of this article.

In summary, the Lifetime Pension pays a fortnightly income for life but there is a provision for your estate to receive at least the total of your initial investment regardless of how long you live. For example, if you invested $100,000 and died after receiving $50,000 then you your estate would receive $50,000 as a reimbursement, but if you died after having received $100,000 or more of income then no reimbursement would be provided.

A Lifetime Pension can be taken out on a single basis or you can opt for spouse protection - the latter provides that should you die then the pension would continue to be paid to your spouse until their death. The cost of spouse protection is a slightly lower level of annual pension payment, as illustrated in Table 1 below which shows some indicative current payment rates for individuals starting a pension between 60 and 80 years of age. Note that you are not eligible to start a pension unless you need the normal criteria for access to superannuation.

Table 1: Annual payment amount at commencement per $100,000

Starting Age Single Spouse Protection
60 $6,614 $5,707
65 $6,716 $6,107
70 $7,529 $6,684
75 $8,777 $7,551
80 $10,834 $8,920
PDS, Page 26

Note that the payment rates on this product exceed those typically available annuities and that flags a feature of this product needs to be stressed - thatthe payment levels are not guaranteed, and are dependent upon the performance of the investment pool and some other factors, including mortality experience. Every July 1, the previous year’s income is adjusted based on how well the pool has performed against a benchmark net return of 5 per cent. In other words, if the return is more than 5 per cent, you may expect a proportional pay increase next year but, when returns are less than 5 per cent, you can expect a reduction. Table 2 below, contained within the PDS, provides an example.

Table 2: Impact of investment returns on pension payments

Pool financial result Annual amount the following year would:
10% Increased by 5%
5% Stay the same
0% Decrease by 5%
PDS, Page 28 "John's Story"

In dollar terms , let’s assume you were receiving $500 a fortnight as an income stream. If net returns were 10% – 5% over the benchmark – you could expect your income to increase about 5% the following year to $525 a fortnight. However, if net returns were 0 per cent you could expect a cut to $475 a fortnight.

Other considerations regarding the product include:

  • In terms of the age pension tests, only 60% of actual income is included in the age pension income test, and only 60% of the purchase price (and 30% after age 84) is included in the assets test.
  • It needs to be stressed that you cannot exit this product except during the initial six-month cooling off period - hence again, why we recommend professional advice to avoid any possibility of "buyer's remorse".
  • Unlike annuity payments, where we always suggest that individuals choose cover for inflation, there is no intrinsic inflation protection mechanism built into this product, and
  • There is no ability to withdraw lump sum payments - and this is why it would perhaps best be used in conjunction with an account-based pension, as the combination would offer the prospect of a good income for life and concessional assets test treatment together with flexibility.

Download the Lifetime Pension PDS

The main reasons why Age Pension claims are rejected – April 10, 2021

Services Australia (SA) recently published a short summary of why most claims for the Australian age are declined. No real surprises, but they include:

1. Applicants haven’t been an Australian resident for long enough

To obtain an Age Pension you generally need to have been an Australian resident for at least 10 years. For at least 5 of these years there must be no break in your residence. Some people can get Age Pension if they’ve been a resident less than 10 years - but this usually depends on whether they have been resident in a country with which Australia has an International Social Security Agreement..

2. Applicants don’t reply to requests for more information within the requested time-frame

SA will write to you if they need more information to assess your claim. If you don’t reply within the proscribed time given in the letter your claim will be rejected. Communicating via myGov rather than by letter is usually going to be more efficient - so set up an account if you don't already have one.

3. Applicants own assets above the cut off point

SA includes assessable assets owned by the applicant and partners - wherever in the world - in the assets test.

4. Your income is above the cut off point

SA ncludes assessable income earned by the the applicant and partners - whatever or wherever the source, including foreign pensions - in the income test.

5. Applicants don’t provide all necessary documentation

When you claim online, SA will let you know which documents you need to provide prior to submitting the claim - and there is a checklist provided.

We can assist in providing advice with respect to Age Pension claims, but professional fees will apply and if your circumstances are not complex then any queries in relation to the Age pension should be made directly to Centrelink. In particular, Centrelink's Financial Information Service (FIS) can help you understand your financial affairs and options.

Super Contribution Caps and Transfer Balance Cap to increase from 1 July 2021 - February 28, 2021

From 1 July 2021, the concessional and non-concessional contribution caps are set to increase due to indexation for the first time ever since July 2017.

The concessional contribution cap, currently $25,000, is indexed to " average weekly ordinary time earnings" (AWOTE) in increments of $2,500. Given the announced AWOTE figure for the 4th quarter of 2020, the concessional contribution cap will increase to $27,500 pa from 1 July 2021.

The non-concessional cap will also increase in 2021-22, from $100,000 to $110,000. Accordingly, the maximum amount an individual under 65 at the start of the year can contribute under the bring-forward rules will also increase from $300,000 to $330,000 from 1 July 2021.

Note that the proposal announced in the 2019 Federal Budget to extend access to the bring-forward rule to people under age 67 at the start of the first financial year has not yet been legislated. Therefore, currently, only individuals who are aged under 65 at the beginning of the financial year are eligible to trigger the bring-forward rule

Finally, the $1.6 million non-concessional cap threshold will also increase due to the indexation of the general Transfer Balance Cap on 1 July 2021 to $1.7million.

Historically Low Term Deposit Rates - Dec 29, 2020

Just to put into perspective just how low term deposit rates are, the chart below illustrates the interest rate payable on 12 month $10,000 term deposit since 2000.


We have long commented on the dangers attaching to an over reliance on term deposits, but apart from concerns relating to how self funding retirees maintain income in these circumstances, there is now a concern that many are are progressing too far along the risk curve to maintain their income and will be over exposed to any significant volatility in equity prices.

How are Super Funds Performing - November 23, 2020

For anyone wondering how Australian super funds have performed following the large drop in the Australian equity market earlier this year because of Covid 19, the best performing balanced funds are beginning to show positive returns on an annual basis. Despite the equity markets improving over the course of the last six months, they are still well down on levels seen at the beginning of the year; however the larger funds particularly have benefited from diversification, including investment in the big US tech stocks.

The charts below illustrate the best performing balanced funds over 1 and 5 years, with a number of funds (highlighted in blue) that feature in both lists.

Feedback on the Retirement Income Review report – November 21, 2020

There will be a lot of media speculation regarding the impact of the Retirement Income Review report which was released on Friday, November 20, having been with the Government since July.

Our short take on the impact of the report is as follows:

Firstly, the report is likely to be seen as supportive of the Government seeking to pause or discontinue planned increases in the superannuation guarantee (SG), currently 9.5% of ordinary time earnings. The Report takes the view that an increase in the SG is likely to reduce real-time wages and, when considering all factors, Australia is comfortably placed in terms of retirement income - particularly if we look beyond simply superannuation and pensions. The areas of most concern were Australians entering retirement in rented accommodation and those made redundant late in their working life

Secondly, the report notes that much of the accrued superannuation balances are not being used by retirees and are being passed on as inheritances. The report suggests that individuals need to appreciate that retirement income should include a draw down of capital rather than simply seeking to live on investment income and retain capital.

Thirdly, the report highlights individuals who are accessing the full age pension whilst living in high-value residences, and clearly places a focus on improving mechanisms to extract income from assets, such as the Pension Loan Scheme. Like many commentators, including ourselves, the report is critical of the imbalances caused by having main residences fully exempted from the pension assets test.

In terms of the second item above, we do think that many retirees are retaining too much capital, sometimes at the expense of their own quality-of-life, but largely over concerns relating to future medical costs and aged residential accommodation. The report does not extend to making comments regarding aged care accommodation, but as we mention in the website, many retirees have a highly exaggerated view of the cost of aged care accommodation and the Government should review the funding mechanism.

Retirement Income Review – Final report released – November 20, 2020

The federal government has finally released for public consumption the Retirement Income Review, which it received in July of this year. You will remember that the review was restricted to providing the government with a "fact base" around retirement income, and precluded from making recommendations; obviously to provide the government with with as much manoeuvring space as possible.

A copy of the report can be found at this location. We will be providing feedback in due course once we've had a chance to consider the findings.

Large life insurance premium increases scheduled for 2021 - November 12, 2020

Within the website we mention the need to continually review the need for life insurance, including reducing cover as you approach retirement, on the premise that many people will have a reduced "need" and because the cost of cover increases substantially with age. There is also a need to ensure that any cover you have is quality cover which fits your circumstances; do not rely upon direct marketed insurance unless you've taken the time to fully understand all the terms and conditions applicable.

There is now a particular need to focus on the need for cover in the new year, with a major life insurer flagging substantial increases in the cost of cover - outside pure life cover - in 2021. The suggestion is that cost of critical illness cover will increase by 9.5%; TPD by an average of 9.7% - with substantially higher increases applying to blue-collar occupations - and income protection by 13.6%.

These increases should be seen as indicative of price changes across industry, and probably a decreasing tolerance for accepting unusual risks.

Potential reduction in deeming rates signalled – November 7, 2020

The Federal Treasurer, Josh Frydenberg, seems to have signalled that a reduction in deeming rates may follow as a consequence of the RBA's decision this week to reduce official interest rates to a record low 0.1%.

Most retirees will be aware that the current deeming rates - 2.5% for investment balances over $53,000 for singles and $88,000 for couples - are now well above the risk-free rates of return that used to be available through term deposits in the past.

SMSFs - The love affair with property continues - October 20, 2020

Recent quarterly statistics release by the ATO have confirmed that SMSFs continue to make significant investments in property, both commercial and residential, with a 9% increase in real property assets held in the full year to June 2020 - and a corresponding increase in limited recourse borrowing arrangements (LRBA), which largely finance these investments. See the table below for more details.

Many commercial and residential landlords have been severely affected by Covid 19, with some tenants being unable to maintain rental payments, and it remains to be seen how the valuation of (particularly) commercial properties will be impacted. Meanwhile, retirees are between a rock and a hard place, given disappearing returns on term and bank deposits, and an environment where lending rates are at historic lows, and even the Reserve Bank seems willing to accommodate asset inflation.

In short, do super members jump on the property bus once again? The answer is probably going top be a "yes" for younger members, given a more favourable lending environment and their ability to balance the additional risk and volatility with high returns, but the lack of liquidity and enhanced risk make it a particularly difficult decision for older members.

The Retirement Income Review - Time to release - October 6, 2020

On July 24, the Treasurer received the 600+ page report of the Retirement Income Review. The Report was to,“to establish a fact base of the current retirement income system that will improve understanding of its operation and the outcomes it is delivering for Australians”.  The Panel had been asked to identify:

  • how the retirement income system supports Australians in retirement;
  • the role of each pillar in supporting Australians through retirement;
  • distributional impacts across the population and over time; and
  • the impact of current policy settings on public finances.

Note that the Panel has been instructed not to make any recommendations but to set the fact base which can then be used for public policy initiatives - presumably so that the Government would not bound to implement any recommendations. The report has been much anticipated, mainly because it may contain commentary around the level of the superannuation guarantee, and more precisely whether it should increase in the current Covid 19 environment.

Our interests are wider; we believe the current retirement income system is just too complex and inadequately integrated and see the Report as a means of creating common ground upon which a fairer and more transparent can be implemented. Currently, the system shares the same awful complexity that we see in aged care and large parts of the health system.

We see no reason for the Government to continue sitting on the report, particularly since it is only a "fact base".

Financial planners witness the enormous cost of pursuing the impossible - the total elimination of risk - August 26, 2020

To the outsider, Australia represents a freewheeling and carefree environment, one that doesn't eschew risk.

In reality, Australia has a talent for bureaucracy - new migrants and expatriates are often perplexed at the high, and clearly growing, level of regulation in Australia, as are older generations.

Why are these comments being made in the columns of a website focused on retirees? It's because the single-minded pursuit of risk reduction has clear costs - and an example has been the introduction of huge compliance burdens on the financial planning community. The result has been a reduction in the number of financial planners by nearly 25% over the last 2 years, and the very real prospect that financial planning in the future will be an activity reserved entirely for the well off and rich.

When the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services industry was announced, it was applauded by many in the community, including financial planners who are looking to have "bad apples" and poor performers pushed out of or excluded from the industry. However, the increased licensing costs and new education standards, including countless hours spent on ethical training, have forced many older, very experienced financial planners - who naturally service the retiree market - to simply leave; unprepared or unable to meet these new requirements. Now, in a situation where people need good advice more than ever, there are fewer people to provide it and at higher cost.

Moves need to be taken not just to limit the amount of compliance activity in financial planning, but across broad swathes of Australian industry - and not just limit it, but reduce it and consequently reduce living costs. Money now spent on compliance needs to be shifted into financial education, across all age groups, and there needs to be an acceptance that you cannot reduce financial risk to zero - otherwise you risk underwriting absurdly poor behaviour at the taxpayer's expense.

In terms of how advice can now be provided to middle income earners on a reasonable basis, we need to look at the suggestion made by the Actuaries Institute that Superannuation funds could fill the void to some degree, mentioning that, "the current AFS licensing rules make giving guidance or advice to individuals difficult and expensive".

In terms of the issue, at least the Labor Party appears to accept that there is a problem. Indicating that the dwindling supply of professional financial advisors has been a "disaster for consumers" and that, "The gap between need and availability has never been greater", it nevertheless refuses to accept the need for changes to the compliance regime. A bit of having your cake and eating it (too), but that's politics.

Superannuation and the Retirement Income Review - an unmistakable opportunity amidst a crisis - August 15, 2020

The Government received the final Retirement Income review report on Friday, July 24, and has yet to comment on any findings. To a degree that is understandable, given the interposition of the Covid 19 pandemic and more immediate priorities

Coincidentally, there are rumours that the Government is pondering a decision to back away from an election promise to honour the scheduled rise in compulsory superannuation contributions. The Government is likely to rely upon concerns expressed that arise in contribution levels would lead to lower wage growth over time, including a recent comment to that effect by the Governor the reserve bank, Dr Lowe. That is particularly pertinent given that the country is facing the deepest recession since the 1930s.

What is clear at the present time is the Government has an unprecedented opportunity to make fundamental changes in terms of superannuation, taxation and retirement incomes to rebalance the system in an equitable fashion that serves stakeholders across all age groups. Whether it has the courage and time to do it justice is another question.

SMSF Performance - Covid 19 - July 8, 2020

The ATO provides very good statistical information with respect to self managed super funds (SMSF), but it is subject to a delay of 12 to 18 months - consequently it is not yet possible to assess how they have performed in detail over the last financial year, given the impact of the Covid 19 pandemic.

However, some information regarding asset allocation in SMSF's, illustrated in the chart below, does provide some insight and would make the following comments.

  • SMSF's do have a significant exposure to listed shares, and that increases significantly during the retirement phase. Those investments are likey to have a bias towards (previously) high dividend paying shares, such as the Australian banks, and the SMSF's would have suffered twofold as both shares prices declined and companies reduced dividend payment levels.
  • SMSF's continue to maintain high levels of liquidity, in terms of cash and term deposit levels. This is consistent with financial advice, including comments within this website, that retirement funds should maintain around two years worth of income is cash. This should assist the funds in coping with high market volatility - and not require them to dispose of investments in poor market conditions.
  • The figures show a very much reduced exposure to leveraged residential property investment in the retirement phase (limited recourse borrowing arrangements = LRBA), which is a very positive sign and reflects the need for additional liquidity.

Industry Superfund Performance - 2019/2020 - July 7, 2020

It's rare that superannuation fund members would feel some relief hearing that their super fund barely broken even over the last 12 months - but 2020 has been anything but normal so far and the savage downturn in Australian equities as a result of the Covid 19 pandemic has hit many super funds very hard.

AustralianSuper, the largest Industry fund, has just announced that their balanced fund - chosen by 85% of their members - made a 0.5% return over the last financial year, the worst result in over a decade. Exposure to tech stocks in the US effectively saved AustSuper from a negative result, with domestic equities and property generating returns of -5% and -6% respectively.

AustralianSuper, reflecting on the market fall earlier this year, noted that, "We had $8 billion switching from growth options to cash options, and they all did it at the bottom." That doesn't mean that all investors should just "hang on in there regardless" as circumstances will vary, but acting too presumptuously can be expensive.

It will now be exceptionally interesting to compare the relative performance of the Industry funds, who have wider diversification options available to them because of size, with self managed superannuation funds (SMSF) , which are typically much more exposed to the domestic equity market.

Changes to Concessional and Non-Concessional Contributions and the application of the Work Test - July 1, 2020

From July 1, 2020, as long as you are less than 67 years of age, you no longer need to meet the requirements of a work test or work test exemption if you want to make concessional or non-concessional contributions to super. Previously the limit was age 65, but the requirement has now been pushed back to age 67 in an effort to align ages for both super and the age pension. The Age pension age will increase from age 66 to age 67 from 1 July 2023.

In summary, this mean you can contribute any amount up to the annual concessional and non-concessional contributions caps for the financial year (currently $25,000 and $100,000 respectively) as long as you are aged less than 67. In addition, subject to legislation currently before Parliament being passed, you may also be able to use the bring-forward contribution rules to make a larger non-concessional contribution of up to three times the normal annual cap, in other words 3 x $100,000 = $300,000 - if aged under 67.

In another change, from July 1 spouses below the age of 75 can now receive spouse contributions - previously the maximum age was 69. There remain a number of stringent requirements before an offset can be claimed - in terms of meeting the work test mentioned above if aged over age 67, maximum income and super fund balance requirements.

A quick summary of what has happened to the ASX over the last 6 months - June 30, 2020

The chart below illustrates just how turbulent the first half of 2020 has been in the financial markets. Limiting ourselves to just the ASX, despite all the commentary about how "out of step" the equity markets have been with the "real world", it remains the case that the ASX on June 30 was 17.6% lower than its February high.

Some confusion over minimum payment rates for Superannuation income streams - June 15, 2020

There have been reports in the media recently which suggest that some super funds have not been as clear as possible in communicating the impact of new minimum rates of superannuation payment in some cases - or have been instituting the new levels on a "default" basis without enough individual discussion with members.

Because of the significant losses sustained in financial markets as a result of the COVID-19 pandemic the Government acted to reduce the minimum annual payment required for account-based pensions and annuities, allocated pensions and annuities and market-linked pensions and annuities by 50% for the 2019–20 and the 2020–21 financial years; see this ATO page for more details and the table below.

It is important to appreciate that these new minima are not mandatory payment levels; retirees can continue to receive whatever payment levels they want subject to meeting the new minima. The new minimums were simply introduced to allow more flexibility for individuals where the standard drawdown levels were creating difficulties because of market conditions.

Minimum Annual payment as a % of account balance
New Minimum % Annual Payments 2019-20 and 2020-21

Retiree organisations need to strike a balance - June 14, 2020

For many self-funded retirees 2020 has represented an almost perfect financial storm. Extremely low interest rates saw many move into the sharemarket in search of improved returns, both capital and dividend, and then the Covid 19 pandemic saw a 30% drop in the local sharemarket; with many major companies, particularly banks, reducing or completely withdrawing dividends.

That has led to many retiree organisations calling for a range of measures to redress the shortfall in retirement income, varying from a universal wage through to changes in the age pension, particularly the taper rates, deeming rates and access to the Commonwealth Seniors Health card.

Some of these measures are well thought through, but there needs to be an appreciation by retiree groups that the impact of the Covid 19 pandemic has been exceptionally widespread and, whilst retirees deserve attention, they are not alone. Additionally, with many of the measures taken during Covid 19 focussed on protecting the older generation, there are many in the community - you just need to read the comments in the major papers - who believe retirees are now being ungrateful and unwilling to bear their fair share of the cost.

Consequently, any changes in terms of the age pension, deeming rates or concession cards need to be considered against the backdrop of general "fairness". The community won't react well to stories of how individual retirees "lost $250,000" in the sharemarket drop if those retirees had a superannuation fund of $2.5 million.

There needs to be flexibility shown in terms of a whole raft of superannuation income tax measures - particularly around capital gains tax and the treatment of the family homes. Measures such as reducing the interest rate on the pension loan scheme should be considered carefully, as it enables individuals to access equity and take advantage of low interest rates, but there should not be any subsidisation. Otherwise, for example, young couples and families seeking to enter the real estate market might rightly feel aggrieved.

So, in summary, retiree organisations should seek positive and constructive change, but it needs to be done in the fair and measured fashion, focusing on retirees with any real need and having regard to the community as a whole.

Super Fund Performance - The impact of COVID 19 - May 11, 2020

Everyone will be aware that equity markets, including Australian equity markets, were very significantly affected by the impact of the Covid 19 pandemic; with the ASX down nearly 30% at one point compared to highs reached earlier in February, 2020.

Obviously this has had a significant impact on super fund returns, with many Australian balanced and growth funds having a significant exposure to the ASX. The extent of that impact is illustrated by the chart below which displays the year-to-date performance of some of Australia's best performing balanced funds over the last five years. Returns amongst this group range from around -3% to -6.5% in the period from July 1, 2019.

Early thoughts on what lies beyond the Pandemic - April 11, 2020

It seems too early to be turning our minds to what might happen after the corona virus pandemic, and tempting fate! However, the measures taken so far to isolate the community and keep us all safe will have an enormous cost, and we need to ensure that all parts of the community - including retirees - participate fairly in the financial re-building. It is not satisfactory or ethical to think in terms of merely managing the debt - the financial equivalent of "kicking the can down the road" for future generations.

Politics in recent years has become more factional, more reliant of catering to often narrow support bases rather than seeking a national consensus. That can't continue to be the approach adopted if all parts of the community are to bear an equitable load.

There is a belief that Australian are better managing emergencies than "good times" - and the recent bush fires and corona pandemic provide some support to that argument. If that is the case, the earlier we discuss "what happens after" the better for all of us.

Other interest rate impacts to bear in mind - March 26, 2020

For many retirees reliant on bank term deposits for regular income, the relentless reduction in interest rates over the last few years, culminating in the generational lows wrought by the corona virus pandemic, has caused enormous stress and angst.

There is however another side of the coin, and low interest rates have some upside in certain particular areas. For example:

  • The maximum permissible interest rate (MPIR) is the interest rate that converts the refundable accommodation deposit (RAD) into a daily accommodation payment (DAP) for residents of aged care accommodation. This rate has been trending down, very modestly, from 4.91% on January 1, 2020 to 4.89% on March 20, but should fall more markedly, effectively reducing DAP levels for new entrants to residential accommodation.
  • Recent events may also see a reduction in the current interest rate applying to the Pension Loan Scheme, although there was a significant drop in the effective rate from 5.25% to 4.5% per annum on January 1, 2020. Reductions in this rate, and those applying to reverse mortgages in general, should make it more cost-effective for retirees to extract income from their residential properties on a more attractive basis.

Deeming Rate and Super Changes - March 23, 2020

Just confirming some recent announcements regarding deeming rates and superannuation drawdown and release arrangements.

Deeming rates

On top of the deeming rate changes made at the time of the first Corona Virus package, the Government is reducing the deeming rates by a further 0.25 percentage points to reflect further rate reductions by the RBA.

As of 1 May 2020, the lower deeming rate will be 0.25 per cent and the upper deeming rate will be 2.25 per cent.

Drawdown rates

"The Government is temporarily reducing superannuation minimum drawdown requirements for account based pensions and similar products by 50 per cent for 2019-20 and 2020-21."

Early release of Super

The Government will allow individuals in financial stress as a result of the Coronavirus to access up to $10,000 of their superannuation in 2019-20 and a further $10,000 in 2020-21.

Eligible individuals will be able to apply online through myGov for access of up to $10,000 of their superannuation before 1 July 2020. They will also be able to access up to a further $10,000 from 1 July 2020 for another three months. These amounts will not be taxable and the money they withdraw will not affect Centrelink or Veterans’ Affairs payments.

A tumultuous week - financially and socially - March 21, 2020

It has been a tumultuous couple of weeks, both socially and financially, but we would just summarise a couple of items that might be of interest to retirees, or individuals on the cusp of retirement.

Firstly, there are clear indications that, as part of a new corona virus assistance package to be announced shortly, the government will be reducing the minimum drawdown rates associated with superannuation. This reflects a similar moved made during the global financial crisis more than a decade ago. The current drawdown rates vary from 4% for someone aged under 65, to a peak of 14% for those aged 95 and over.

Some flexibility is in order, but you will notice that in ordinary times we have a concern that many retirees aren't drawing down adequate funds, and place too much emphasis on savings. This is only likely to increase further in this uncertain environment, and this is a weakness with the Australian superannuation system. General uncertainty prompts individuals and families to maintain even more reserves against unforeseen costs or a rise in living costs.

Secondly, there are some indications that access to superannuation prior to retirement, on financial hardship grounds, will be made easier - temporarily. This sounds sensible, but needs to be approached carefully, because significant withdrawals particularly in this environment would give rise to liquidity problems for superannuation funds.

Thirdly, the tremendous recent reduction in interest rates will be reflected in deeming rates during the course of May, as we mention below, but the other side of this coin is that this makes reverse mortgages a considerably more attractive option, if low interest rates become a prolonged feature of the environment.

Government announces reduction in "deeming rates" - March 13, 2020

On March 12, the Federal Government announced, as part of a package of measures intended to address the financial impact of the coronavirus pandemic, that there would be a reduction in the "deeming rates" associated with financial investments, which applies as part of the assets test for the age pension. The changes involve a decrease in the lower rate from 1% to 0.5% and the upper rate dropping from 3% to 2.5% - reflecting a significant drop in interest rates.

A media release from the Department of Social Services indicated that about 900,000 Australians would see an increase in their fortnightly social security payments and that on average age pension is a receive an additional $8.42 a fortnight, or $219 a year.

Rather confusingly, the release said that the, "extra money will start flowing through into peoples banks accounts from May 1". The presumption is that this means the effective date is May 1, but we have yet to be able to confirm as such.

Coronavirus - Some further thoughts - March 7, 2020

Reading about the coronavirus, and its potential impact in Australia, is almost unavoidable at the present time. We would make a couple of short comments.

Firstly, residential aged care accommodation will come under significant pressure, given that their occupants are at most risk to the virus - by virtue of age and probably pre-existing healthcare conditions. This will place these businesses under both operational and financial pressure, which we hope will be recognised by the Government. Clearly, unless there are no alternatives, individuals should probably not be moving into residential aged care accommodation in the short term, and we would expect operators to be very selective in terms of new residents. The relatives of residents should expect, and support, restrictions on their access to the facilities - to mitigate the risk to residents.

Secondly, the coronavirus is already having a significant economic impact, and at the present time it's unclear about both the severity and duration of any impact. Regardless, however, the share markets have suffered a significant correction and we have seen yet another interest rate reduction by the RBA. At the earliest opportunity, the Government should be reviewing the deeming rates used in the age pension test, the interest rate applying in relation to the pension loan scheme and the maximum permissible interest rate (MPIR) which is used to convert refundable accommodation deposits (RADs) into daily accommodation payments (DAPs).

The Coronavirus and Retirement Villages - March 3, 2020

There is an enormous amount of media attention now focused on the coronavirus and its implications in Australia. Given that the virus has a particularly elevated fatality rate for the elderly and those with pre-existing medical conditions, we expect a lot of attention will be focused on the residents of residential age care homes - and the operators should be, or shortly should be, in communication with residents and their families regarding their preparedness and action plans.

The residents of retirement villages will attract less attention, simply because they are living independently and have a lower age profile. Nevertheless, we think it is incumbent on the operators, particularly where there are co-located aged care facilities, to also communicate with retirement village residents regarding their approach to minimising the risk of coronavirus. We say minimising, because it seems almost inevitable at this stage that the virus will become widespread throughout the community, and the efforts of this stage are focused largely on delaying its onset and spread, with a view to reducing pressure on health facilities and the economy at large.

From a layman's perspective, we think the following are important issues:

  • If residents have external families, there should be some discussion around whether, if and when residents should move in with family members, in situations where the virus becomes prevalent in their retirement village. This is very situational, and dependent upon the personal, medical and family circumstances of residents.
  • Our experience is that, given the age profile of retirement villages, it is very common for a significant percentage of the community to have ongoing and regular requirements for medical attention, including visiting hospitals and medical facilities, and this raises the risk of the virus transferring into the retirement village. Therefore residents need to exercise common sense and reduce their level of "face to face" contact with other village residents, in favour of electronic means.
  • Similarly, many residents have support staff in common, ranging from district nurses to regular cleaners - we think is reasonable to suggest that any services that are "discretionary" should be suspended indefinitely - to minimise external contact.
  • Finally, as with other members of the community, residents should ensure that they have adequate stocks of any medicines that they require on a regular basis, to reduce their need to visit a pharmacy, or medical establishment.

Radical reform of Retirement Income - Possible in Australia? - February 20, 2020

In his submission to the Retirement Income Review, Prof Kevin Davis of the University of Melbourne, suggests a "radical" way forward in terms of retirement income, involving:

  • introduction of a universal (non-means-tested) full age pension

  • restoring tax on the income of super funds in the retirement (pension) phase

  • other tax changes, including removing the seniors and pensioners tax offset, and a different tax scale for those in receipt of the pension.

We think the approach has considerable merit, and have discussed it internally, but lacked the ability to model the outcomes in terms of the relative cost to Government. The approach would have the benefit of markedly simplifying the nation's approach to retirement income, and perhaps being almost Budget neutral.

Prof Davis acknowledges, unsurprisingly, that there would be "winners and losers" in the approach but the only losers with be those with "retirement superannuation balances currently generating tax-free income in the region of $100,000 p.a above". Regrettably, looking back at the last Federal election, the state of politics is such that our "leaders"seems unwilling, or unable, to manage the introduction of a policy with any apparent "losers".

What we don't think Australians appreciate just how odd our approach is to the taxation of retirement contributions and income, compared to the rest of the world. Most developed countries, such as the UK, US Canada and most of Europe, provide a tax holiday or contributions to pension funds, and then tax the funds at normal marginal rates on retirement. Our problem in Australia partly stems from the curious decision made to tax superannuation contributions at 15%, presumably for cash flow purposes, and in the latter decision to forego taxation on (most) income streams post age 60.

The latter decision will prove untenable, and something significant and radical is needed to fix the current system, and reduce the level of complexity for retirees.

As an addendum, in the National Australia Bank's latest Wellbeing Survey, the major cause of financial anxiety and the community was identified as:

"....financing our retirement. Not having enough to finance retirement was not only the biggest concern, for all Australians, but their level of concern also increased slightly to 55.4 points out of 100 (55.0 in Q3). A score of 100 signal ‘extreme’ concern."

Addressing this anxiety, apart from having societal benefits, would likely also lead to a whole spectrum of Australian society feeling more comfortable spending - rather than saving "just in case" - with very significant multiplier benefits.

Does a better breed of Life Cycle Products offer an improved investment strategy? - January 23, 2020

Research suggests that around 80% of the superannuation funds regulated by APRA - and that includes both industry and retail superannuation funds, but not self managed superannuation funds - are invested in the individuals funds "default investment option". In all likelihood, the default option will have an allocation to growth assets of about 70 per cent and be called the "balanced option".

That investment option worked out very well for most members in a balanced investor option during the course of 2019, given the significant exposure to growth assets - and particularly with respect to Australian and international equities. Indeed, consultants Chant West report that growth orientated super funds delivered an average return of 14.7% during the course of 2019. See the chart below for a list of the top performing balanced funds.

Given returns of this magnitude, it would be natural for many superannuation members to simply adopt an approach of remaining with the default investment option, but recent research from Rice Warner suggests that this may not offer the best investment strategy over time.

As part of research released in December 2019, Rice Warner model ised five different investment strategies:

  • A Balanced Strategy which adopted a 70% allocation to Growth assets and a 30% allocation to Defensive assets irrespective of a members age or balance.
  • High Growth Strategy which adopted an 85% allocation to Growth assets and a 15% allocation to Defensive assets for all members irrespective of age and balance.
  • First-generation Lifecycle with an emphasis on defensive assets that segment members by age and de-risk from a young age.
  • Second-generation Lifecycle with higher allocations to growth up to age 55 before slowly de-risking to more defensive levels as members age.
  • Multi-dimensional Lifecycle which adopts a high allocation to growth assets unless a member is at an advanced age and has a low balance.

So-called "life-cycle" products have recently suffered from a poor reputation - largely because they "dialled down" an individual's exposure to growth assets at an early age, sometimes as early as 30, and therefore under-performed quite significantly, compared to balanced funds, in a strong investment climate.

Second-generation life-cycle products begin to reduce exposure to growth assets at a much later stage, typically from age 55 onwards, and continue to maintain a high exposure, circa 70%, to growth assets.

Multifactor life cycle products involve adjusting growth asset allocations according to both a member's age and account balance - the account balance is important because individuals with larger balances typically have longer investment horizons.

Rice Warner research suggests that Multifactor life-cycle products may offer a significant improvement over a balance fund. Rice Warner found that for somebody aged 30 with an opening balance of $26,000, a Multifactor life cycle product had a 91.8 per cent chance of outperforming a balanced fund by the time of retirement at age 63 and that, “Moving to an optimised default strategy (multi-factor life cycle) can increase the expected income a member receives in retirement by up to 35 per cent, or $708,000, assuming that the member is currently in a balanced fund with a 70 per cent allocation to growth assets."

Clearly, life-cycle products are becoming more sophisticated, and may represent a real alternative to simply "moving with the herd" - worth watching in detail and discussing with your adviser.

Royal Commission into Aged Care - Consultation paper: "Aged Care Program Redesign" - December 9, 2019

On December 6 the Royal Commission into Aged Care released a consultation paper entitled, "Aged Care Program Redesign". The overwhelming theme of the consultation paper is "putting people at the centre" of aged care processes - the Commission's view is that the current system is largely focussed on the government's need to manage fiscal risk and financial models rather than on delivering individual care, as well as being overly focused on an institutional model of residential care, rather than care in the home. Nor is the present approach seen as effectively ensuring the quality and safety of aged care, or delivering equitable outcomes.

The consultation paper makes a number of in-depth observation regarding the current process and where improvements might be made, and also provides a model for a proposed (new) aged care system. The model involves providing assistance to individuals and their families through interposing a "Care Finder" - who will provide direct assistance in navigating what will remain a complex system. Click the figure below to download a larger copy of the suggested process diagram.

New model of aged care process

Retirement Income Review - Consultation Period - November 25, 2019

The Government has initiated a Retirement Income Review, which is scheduled to report by June 2020, following a consultation period which finishes on February 3, 2020. Interested parties are now invited to comment on a consultation paper released by the committee.

The terms of reference of the review are that it will, "establish a fact base of the current retirement income system that will improve understanding of its operation and the outcomes it is delivering for Australians. The Retirement Income Review will identify:

  • how the retirement income system supports Australians in retirement;
  • the role of each pillar in supporting Australians through retirement;
  • distributional impacts across the population and over time; and
  • the impact of current policy settings on public finances"

Obviously, establishing a clear factual basis for discussion around retirement options is crucial; but clearly the Government has sought to minimise the chances of the Review producing politically unattractive recommendations - and the Treasurer has expressly indicated that family homes would "never" form part of the assets test for pension purposes. Why he would seek to exclude that possibility from any general analysis is irrational, other than for overtly political reasons - given the significant part that property plays in the wealth of Australian households. To illustrate, see the chart below - which also appears in the consultation paper

For those relieved at the thought that the family home will not form part of any assessment - be careful what you wish for. There is a real possibility that the Government will look for cost savings in other areas, such as deferring access to superannuation (in line with pension age), the further taxation of superannuation and inheritance taxes. Unfortunately, it is just not viable or acceptable to have individuals obtaining the full age pension while sitting properties valued at $2 million or more; which are now capable of generating a reasonable income through the pension loan scheme or reverse mortgages.

Interestingly, the consultation paper also makes reference to individuals saving beyond their retirement income needs. The concern is to determine whether this is a function of individuals being concerned about longevity risk, or whether superannuation is being used as a tax efficient structure for savings and wealth accumulation.

We think evidence exists for both approaches, but the majority of individuals (if not the vast majority of funds involved) are saving more than they should or need to simply to ensure against longevity risk and substantial one-off costs - be they medical gaps, household repairs or family emergencies.

The focus should be on alleviating pressure on these individuals - because it holds out the promise of substantially improving the welfare of a large number of retirees whilst liberating funds into the economy, and potentially improving turnover within the real estate market for younger generations. Superannuation funds of very significant size which extend well beyond retirement needs do not warrant any form of community support.

Answering the perennial question - "How much can I spend ?" - November 7, 2019

The proper answers to this question is as always..."it depends on your personal circumstances". But the Actuaries Institute has come up with a novel "rule of thumb" about how much a retiree can spend in each year of their retirement.

Their suggestion is, and this applies only to single pensioners who are homeowners, is that the "average retiree" should be spending a percentage amount equivalent to the first digit of their age each year to avoid over and under spending. In short:

  • draw down a baseline rate, as a percentage, that is the first digit of their age
  • add 2% if their account balance is between $250,000 and $500,000
  • the above is subject to meeting the statutory minimum drawdown rule

Hence, someone age 65 would spend an amount equivalent to 6% of their superannuation/investment base every year, and someone aged 75 would spend 7% - and, if they had $350,000 in savings, they could spend a further 2%.

For more information about their approach and recommendations, read "Spend Your Age, and a Little More, for a Happy Retirement".

The "good thing" about these approaches is that they do foster more discussion; the "bad thing" is that most people aren't "average" and will often benefit from advice which is individual to their situation.

Some thoughts about "lower and longer" interest rates - November 6, 2019

There is a very real prospect, at the present time, that Australian and global interest rates will trend to and remain at historic lows for a very lengthy period of time. This has serious potential significant consequences for retirees; with the recent low term deposit interest rates simply being the "canary in the coal mine".

Very low global interest rates raise the prospect that what is called the "risk free rate of return" will trend to zero, and perhaps lower if you look at bank interest returns in parts of Europe and Japan. This calls into serious question about whether it remains robust to plan a retirement based on the premise that, even with a balanced portfolio of equities and bonds, you will see a return of 5% or more in excess of inflation. Indeed, chief investment officers from major super funds are becoming more public in suggesting that nominal annual returns around 5% - inclusive of inflation of 1.5% - should be considered the new "normal".

At the very least, you must include in your retirement planning more conservative assumptions than have been the norm over the last 10 or 20 years - and consider whether some degree of capital run down should feature in your planning.

Lower interest rates may also have some unusual knock-on implications that will take some time to surface - for example, when individuals enter aged care accommodation they are offered a choice between making a refundable accommodation deposit (RAD) or daily accommodation payment (DAP). A factor, called the maximum permissible interest rate (MPIR) converts between these two payments - if the MPIR becomes very low then DAPs will also reduce significantly, in principle.

Additionally, if the costs of reverse mortgages also reduce in line with normal domestic mortgages, then they will become a more attractive (and less risky) way of generating income, particularly if asset inflation is going to be a consequence of lower interest rates.

Stop Press: The Government announced on October 23 that it would review the interest rates applying to the new Pension Loan Scheme, after criticism that it was "ripping off pensioners". Whilst the current rates (5.25%) are still better than those applying in the reverse mortgages market, that is probably a poor comparison - given the relatively small nature of that market and funding costs.