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It’s a truth universally acknowledged that many retirees worry about running out of savings. Yet most of their retirement savings are in super funds’ account-based pensions which don’t manage the risk of outliving their savings.
“To manage this concern, retirees seek to self-insure by withdrawing the minimum amount possible from their superannuation.” This was the issue highlighted by Treasury’s December 2023 Retirement Phase of Superannuation discussion paper. It found around half of all retirees withdraw at the minimum rate.
It’s not an unjustified fear, especially at a time of highly volatile investment markets.
The TAL and Investment Trends 2023 Retirement Income Report found 33% of pre-retirees expect to outlive their retirement savings.
And there’s the rub. Through no fault of their own, today’s retirees have few options that guarantee them income for life other than the Age Pension, regardless of how long they live. To paraphrase Dickens: a long life, diminishing savings, result misery. A long life, guaranteed income for life, result happiness.
These sentiments have not been lost on the big super funds. From 1 July 2022, funds are obliged to publish their retirement income strategy on their website under the terms of the government’s Retirement Income Covenant. This has removed a roadblock to the development of so-called longevity products designed to provide regular retirement income for life. Progress is slow but some innovative lifetime income products are beginning to hit the market.
What are longevity products?
Longevity products are different to the account-based super pensions commonly offered by super funds.
Good to know
Longevity products such as annuities and newer lifetime income pensions being offered by some super funds typically provide a pre-determined income for life or a set term, but no lump sum withdrawals (although this is changing). Products differ in the investments they hold and the income guarantees they provide. Some allow your pension to revert to your spouse if you die first, or for part of your initial investment to be paid to your beneficiaries or your estate when you die.
These are different to account-based pensions which are the main type of pension currently offered by super funds, so-called because income is paid from a super pension account in your name. There are minimum annual pension withdrawal amounts, but no maximum, and lump sum withdrawals are also permitted. While account-based pensions offer flexibility, both the account balance and income are linked to market movements, with no guarantee that your money will last as long as you do. SMSFs with an account-based pension must allocate the amount supporting the pension to a separate account for each member.
“Longevity products give people the confidence to draw down income from their super and have a better standard of living now with the confidence that if they do live to quite an advanced age there’s still going to be money coming in,” says Ian Fryer, general manager at super research house Chant West.
