Retirement assumptions may be wrong

Retirement income Challenger Capital Preferences Superannuation annuity

A new study has found retirement income choices and preparedness are highly individualised and government modelling of cohorts may lead to inaccurate outcomes.

Data on people’s preparedness for retirement held by superannuation funds and the government may not be accurate, with a new study finding nearly 80 per cent of pre-retirees do not feel ready for that event.

The study, titled “Revealing Member Income Preferences”, conducted by Capital Preferences and supported by Challenger, found 78 per cent of pre-retirees did not consider themselves ready for retirement and their preferences for income certainty were not linked to their salary, age or super balance.

Instead, the study found retirement income preferences were highly individualised and the public data on retirement may mislead super funds and the government in how they group fund members when creating retirement income strategies.

Capital Preferences co-founder and chief scientist Shachar Kariv said the study of 4012 Australian super fund members in October 2023 used a ‘revealed preferences’ methodology to model retirement income certainty preferences.

“Simply relying on demographic data to predict income certainty preferences will almost certainly misdiagnose members and hinder super funds in providing fit-for-purpose retirement income assistance,” Kariv said.

“Our findings highlight the importance of recovering individual preferences as part of the member experience.

“Members can’t self-report their preferences in areas of risk, but they can show us with their decision-making.”

As such, home ownership and ownership of a guaranteed lifetime income product (GLI), such as an annuity, were the top two contributing factors associated with a greater sense of retirement preparedness.

However, the study found two-thirds of people under 65 had no knowledge of GLI products and only 8 per cent of those aged 55 to 65 had any awareness of them.

Capital Preferences noted that while 3.5 per cent, or $43 billion, of the $1.23 trillion pool of retirement income savings, including superannuation, was in GLIs, based on its research a further $145 billion of super for those aged 55 to 74 could be transferred into a GLI to meet their preferences for long-term income certainty.

The release of the research follows the opening of consultation late last year by Financial Services Minister Stephen Jones on an examination into how superannuation members can be supported in navigating the retirement income system, how funds can deliver better retirement income products and how lifetime income products can become more accessible. The consultation will close on 9 February.

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