The Actuaries Institute has called for a three-part overhaul of the retirement income system, warning $326 billion remains “stranded” in superannuation as more than 1.5 million Australians over 65 leave their balances sitting in accumulation phase.
In a new dialogue paper, It’s time: here’s how to turn superannuation into a retirement income system, the institute said the lack of a functioning retirement income framework is leaving retirees with less income than they could otherwise receive while costing them more than $2 billion a year in tax.
At the centre of the proposal is ‘MyIncome’, a pre-set account-based pension that would be offered by APRA-regulated superannuation funds to members from age 65, designed to make the shift from saving to spending in retirement easier.
“We need to normalise drawing an income from super so more people can live with dignity in retirement. The process for accessing a retirement income is too complex so many people simply build up assets in super rather than using them in retirement as intended,” said co-author Nick Callil.
“There is clear inertia when it comes to drawing down income, driven by the complexity of the decisions retirees are being asked to make,” Callil said.
According to the paper, retirees currently face multiple hurdles when trying to start an income stream, including making detailed decisions around asset allocation and drawdown rates, completing extra paperwork and verifying their identity.
Co-author David Knox said the issue reflects a broader weakness in Australia’s retirement settings, despite the strength of the superannuation accumulation system.
“We do not have a retirement income system,” Knox said. “Australia’s well-respected superannuation system has helped millions save for retirement. Now we need an equally effective mechanism for delivering that income.”
Under the proposed ‘MyIncome’ model, funds would be required to offer members aged 65 and over a pre-set account-based pension, while still allowing trustees to tailor product design to their member base.
Members would be free to accept or decline the offer, with the institute proposing a frictionless acceptance process requiring no forms.
“Importantly, our proposal gives superannuation funds the flexibility to design account-based pensions to suit their members and continue to engage with them. Funds know their members best and we want them to continue developing solutions that deliver the best outcomes for their members,” Knox said.
The second limb of the package would require super balances that remain in accumulation phase to be transferred into pension phase at age 75, up to the Transfer Balance Cap, with an income stream commencing from that point.
The institute said the age threshold was selected because members can no longer make voluntary contributions to super from age 75 and because it aligns with international practice.
“Age 75 has been chosen as members can no longer make voluntary contributions to super from that age. It is consistent with international practice and supports the legislated objective of super to deliver income for a dignified retirement,” Knox said.
The third proposal would require funds to begin collecting members’ bank account details from age 60 to smooth the eventual start of pension payments.
The institute said moving more balances from accumulation into pension phase could materially improve retirement outcomes because earnings in accumulation are typically taxed at 15 per cent, while pension-phase earnings are generally tax-free.
Alongside the product and age-based changes, the paper also outlined legislative amendments, regulatory reforms and transitional timeframes it said would be needed to implement the package.
“These policy suggestions are intended to improve overall retirement outcomes while leaving space for innovation and competition between funds” Callil said.
“It should be easy for Australians to access the savings they have worked so hard to accumulate, but the stranded balances issue shows we need to do more,” Knox said.
