New super policy could restrict retiree spending

No matter who wins the looming Federal Election, it appears that we will all have a fight on our hands about the future direction of superannuation.

A Government draft discussion paper that has been sent to super funds for their reaction paints a somewhat concerning and paternalistic future for superannuation which has raised plenty of eyebrows even within the super industry.

In simple terms, the concept is that rather than choosing what happens to your super lump sum, the government would mandate that super funds invest in products on behalf of members that guarantee an income for life.

Effectively, such a change would result in all retirees with more than $200,000 in super investing in annuities, products designed to give longevity protection by having a fixed drawdown pattern.

Downside of annuities

Such products are already available from several providers but to this date they have proved to be relatively unpopular for several important reasons, namely:

• They are relatively inflexible, not allowing for future capital withdrawals.
• They provide generally smaller returns than an account based pension, due to the built in longevity risk and a generally more conservative investment mandate.
• In the event of an earlier than expected death they often leave little or no residual funds for a spouse, dependents or relatives.

These shortcomings have usually resulted in financial planners only choosing to invest a portion of retiree customer’s funds in annuities.

How to stop spending too fast, or too slowly

The main issues that the government discussion paper is trying to correct are two big risks – the risk that retirees can outlive their retirement savings and also the risk that they die without spending the majority of their retirement savings.

Both have proved to be significant problems but there has been considerable discussion about ensuring retirees have the confidence to spend during their retirement and end up dying with much of their superannuation intact.

In other words, the worry is that super is turning into an low tax estate planning tool rather than a true retirement savings vehicle.

What this commentary fails to take into account is that many retirees decide to keep a large amount within superannuation because they fear the financial consequences of ageing – particularly the expenses of moving into aged care and also health costs which can leave a substantial dent in even very large superannuation balances.

Personal choice and control part of the super deal

Of course, the other issue about mandating annuities is one of personal choice and control.

Superannuation has always been sold as a combination of carrot and stick and mandating how retirees should invest their money may reduce the faith people put in superannuation.

Even simple things like withdrawing a lump sum to buy a holiday or car might be very difficult under the suggested framework and lead to many retirees looking to stash some of their retirement cash outside super, before any mandated annuity investment took place.

Using default settings might make administering super easier but it might also provide too much or too little income at various life stages and curtail the flexibility that is very important to many retirees.

It could be that much more attractive annuity products could be produced to match those in other developed nations but the issue of compulsion is one of the weak spots of the otherwise thoughtful Treasury paper.

So, whoever wins the election we are going to need to keep an eye on the development of superannuation policies to ensure that freedom of choice isn’t sacrificed at the altar of superannuation fund convenience.