Clients unprepared for retirement

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The proportion of superannuation assets owned by retirees is expected to rise from 30.3% in 2011 to 42.1% by 30 June 2026.

However, there is a structural weakness in the current retirement incomes system, according to ASFA and Deloitte – It does not provide the products to allow a person to manage longevity risk.

Maximising Superannuation Capital, a report prepared for ASFA by Deloitte Access Economics, highlights the lack of preparedness among baby boomers for retirement. A review panel in 2009, quoted in the report, says that Government should support the development, and remove the rules, that restrict the development of income stream products.

The review panel said it was not convinced however, that annuities should be made compulsory, because this raises equity issues – longevity and income are positively correlated, raising the possibility of low-income annuity holders subsidising high-income annuity holders.

"The annuities market in Australia is thin; there are providers of annuities but the products on offer are of relatively short term and there are few buyers," said the report. Planners have an important role in improving financial literacy of clients, as a low level of demand for these products shows resistance in the community.

Andrew Baker from Tria Partners recently analysed retirement income products on the market, and questioned whether it was possible for such a product to be successfully distributed.

"The track record of these types of products is not especially encouraging.  For every success such as AMP North’s protected products, there’s at least one product development disaster (defined as large investment and small flows) such as ING Money for Life," said Baker.

"MTAA’s RetireSafe demonstrates some of the challenges of developing innovative retirement income products.  The products are often complex and expensive.  The benefits can be hard to communicate and may come with caveats."

Baker says that advice is vital when it comes to these products, but “as Money for Life demonstrated, the distribution challenges can be profound even for an issuer with huge resources and a large adviser force.  For a fund without a significant dedicated advice business, the barriers to success are daunting”.

Do you think Australians are prepared for the draw-down phase of super?