System focuses too much on accumulation

superannuation system accumulation

The compulsory superannuation system has been so focused on the accumulation phase that many people are unsure how to use their savings in retirement.

An overt focus on the accumulation side of the retirement income system has not taught people entering retirement how to use their superannuation efficiently, according to a member of the Retirement Income Review (RIR) panel.

Dr Deborah Ralston said despite the compulsory superannuation system being in place since 1992, it was still immature and few people had yet to experience a whole working life under the compulsory contribution model, but widespread information about what to do with those savings was still lacking.

“What we have done is built a pretty good accumulation system, but it’s not really working very well in terms of being a retirement income system, which is kind of strange because that is the objective we are trying to achieve,” Ralston said during a presentation at the Council on the Ageing Australia National Policy Forum 2021 late last week.

She added that Australian Prudential Regulation Authority statistics show only 10 per cent of members of superannuation funds regulated by the authority were over 65, which indicated people had taken their funds out of super, but may have done little else with them.

“So what are people doing with their money? There are quite a number of people who get to retirement and, in the absence of any guidance or advice, they simply take the money out, pay a few bills and put it in a term deposit,” she said.

“Other people get to retirement and they think, ‘wow, I’ve got a little nest egg for emergencies’ so keep it in accumulation and they don’t even transfer it into an account-based pension. Others do transfer it, but almost invariably draw it down at the minimum rate because – and this is the thinking – we need to make it last.”

She said any further discussion about efficiency within the retirement income system had to include guiding people through the accumulation phase and into retirement to ensure they make the best use of their savings.

“We are a fair way from achieving that outcome, so I am a bit of a fan of the retirement income covenant and I think that this is a new journey for funds moving into a proper retirement income system,” she noted.

“There are some funds that are doing terrific work in this area already, but we need others to come along and to start to deliver the outcomes we need for people to really be able to maximise their well-being in retirement and enjoy the standard of living that they had pre-retirement, and we have some way to go on that as yet.”

The RIR, as one of its core findings, also stated there was a need to improve the general understanding of the system so people could make the best use of assets in retirement.

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