Retirees struggling with tiny interest rates

If there is one group that have been left out of the Federal Budget and ignored during the COVID-19 pandemic it is the self-funded retiree.

Ineligible for the most part for the slew of extra welfare payments and watching on with horror as the dividends that they rely on for income were postponed or slashed while property rents were also hit, it has been a tough time to be living off your savings.

The only follow up after the Budget was the foreshadowed decision by the Reserve Bank to once again run the steam roller over interest rates, with the official cash rate now almost certain to fall to 0.1% in November and for Quantitative Easing (QE) to be introduced.

That will effectively result in all forms of cash deposits, including term deposits, producing a negative yield after allowing for inflation.

Unpopular reverse mortgages the only suggestion

The one bone that was thrown to the self-funded retiree after the Budget came from Assistant Minister for Superannuation, Jane Hume, who urged them to consider taking out a reverse mortgage to stay afloat during the recession.

She suggested using the government’s reverse mortgage-style scheme which allows retirees to take out a loan from the government to cover living expenses, secured against their real estate.

The scheme was expanded last year to allow access by self-funded retirees as well as those on the age pension, with eligible people able to receive payments of up to 1.5 times the pension rate.

She said savings put into the home were part of the retirement income system and “that’s a really innovative and very inexpensive way of adding to their income.”

The suggestion was followed by a succession of unimpressed raspberries from actual retirees, who after a lifetime spent paying off their housing debts did not appreciate the idea of going back into debt to support their income needs.

Although, to be fair to Senator Hume, the Federal Government certainly haven’t been afraid to increase their debt load to deal with the pandemic – even if they will not be the ones to eventually deal with the trillion dollars of government debt.

Deeming rate will also need to be changed

The downward change to interest rates will have other effects on the population of retirees.

One interesting paradox is the pension deeming rate, which currently sits at 0.25% for investments up to $53,000 for singles ($88,000 for couples) and 2.25% for amounts over that.

You would think that Treasurer Josh Frydenberg will soon be obligated to reduce that 0.25% rate down to 0.1% and also reduce the higher rate, which is estimated as a higher percentage return because it is assumed to be a mixed investment across interest bearing deposits and other investments such as shares.

More to go on the pension

The other implication is that some of those who have been or anticipated to be self-funded retirees will now be forced on to the age pension – either as full or part pensioners.

The Association of Superannuation Funds of Australia previously forecast 43% of those reaching retirement age in 2023 would be fully self-funded, up from 22% of those who retired in 2000.

That estimate has now been reduced to 41%, which means about 5000 more people will be relying on government support through the pension or part-pension than previously forecast.

The figure was arrived at by taking into account the effect of the pandemic-induced recession on investment returns, including dividends and deposit rates.

That number can still change depending on how the recovery proceeds but it shows clearly how finely tuned the difference between being a self-funded retiree and a pensioner can be.

Treasury review could bring further changes

The other remaining issue is the detailed Treasury review of the entire retirement income system, which has still not been released publicly.

There is a lot of speculation that the review will be used as a reason to not go ahead with the rise in the superannuation guarantee payment next year from the current level of 9.5% to 10% and eventually to 12% by 2025.

It could also usher in many other changes, although the Federal Government can be forgiven for having its attention elsewhere during the reaction to the pandemic and recession.

The argument from the superannuation industry has been that the planned and legislated super guarantee rises are now needed more than even to allow for a more dignified retirement in the future.

However, for those who are self-funded retirees at the moment, 2020 will go down as a year many will remember for all of the wrong reasons.