The federal government’s retirement income covenant should contain incentives to encourage superannuation fund members to take retirement savings as an income stream, while providing disincentives to leave large sums to their estate, the Actuaries Institute has stated.
As part of a recent policy document, the institute stated it supported the view the retirement income covenant should require super funds to have a retirement strategy and solutions that were appropriate for different member cohorts.
Actuaries Institute retirement strategy group convenor Andrew Boal said the government should make changes to its supply and demand-side policies and these should include incentives that encourage retirees to take part of their super as a lifetime income stream and disincentives for those who want to leave large bequests from superannuation, as well as access to affordable financial advice at the point of retirement.
In the paper, the Institute stated financial incentives should be given where a proportion of an individual’s superannuation assets were placed in a product that provided a lifetime income stream, such as a lifetime annuity, pension or other form of pooled longevity protection.
“The government could make this a requirement for individuals with superannuation assets above a threshold amount based on the rationale that, for a retiree on or above average weekly earnings, a significant proportion of their superannuation balance at retirement would have been generated from tax concessions,” it stated.
The disincentives would also apply for individuals above a set threshold where they took a large proportion of their retirement savings as a lump sum or left them as a bequest.
“For example, where an individual takes a lump sum above a threshold amount, part (or all) of the tax concessionary component of that lump sum could be refunded to government,” the paper said.
“Consideration could be given to a phase-in period for any changes of this type. The Hayne royal commission pointed out that grandfathering previous concessions is a significant source of system complexity, but it can be unfair to those who have made decisions based on an earlier set of rules.”
Boal also said there needed to be greater consideration of the role of home ownership in regards to retirement savings as the current system did not assist those without adequate housing.
“There is a large gap in outcomes for those who do and those who don’t own their own home at retirement,” he said.
“There should be greater assistance for retirees who rent. The system favours homeowners, for example, the principal residence is wholly exempt from the age pension asset test.”
On this front, the institute recommended a portion of the value of a home be included in the asset test, while giving consideration to significant variations in home values across Australia, adding that at the same time more retirees were now using super to pay off a home loan or other large debts.
“The adequacy of the system is now being undermined by the relative ease for older Australians to obtain a mortgage with a long outstanding term,” the report stated.
“Superannuation benefits are intended to be used for retirement living rather than secure mortgages.”