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Super is for spending too, experts say

09:55am February 22 2020

Retirement income is about consuming the capital in super accounts, not just the investment earnings, says Jeremy Cooper. (Emma Foster)

With a fresh retirement review well underway, attention is once again zeroing in on what the design of our perfect system looks like.  

In some ways, the hunt has never really stopped since Paul Keating’s creation of compulsory superannuation in 1992, at least in the past 10 to 15 years. 

Over that time, superannuation -- and thus the outcome of many people’s retirement – has been tinkered with and also affected in one way or another by the Cooper Super System Review, the Murray Financial System Inquiry, The Future of Financial Advice (FOFA) reforms, the Productivity Commission’s Superannuation: Assessing Efficiency and Competitiveness report and The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. 

Now, the federal government’s “Retirement Income Review” will take a look at “the incentives for people to self-fund their retirement, the fiscal sustainability of the system, the role of the three pillars of the retirement income system, and the level of support provided to different cohorts across time”.

While superannuation is just one of the so-called three pillars, alongside the age pension and voluntary savings, it will likely form a key part of the independent panel’s review and the “fact base” it delivers to government by June.  

This week, the man who chaired the 2009 Super System Review, Jeremy Cooper, waded back in to the long-running debate, predicting that by 2030 super will be overseen by a new managed fund regulator and that franking credit cash refunds would no longer be sustainable for the budget. 

However, he also called out a partly psychological challenge: the attitude towards eating into super balances. 

“A risk at the moment is that I think that the community…  are not engaging with what retirement income actually means. We’re still thinking in an investment frame, we’re still thinking about what you might call investment income,” he told a panel at a self-managed super fund conference on the Gold Coast this week. 

“Superannuation is a consumption smoothing mechanism… it’s great fun investing, I love it but the deadly serious part when I retire…I have to think of retirement income as also consuming that capital because that’s why I deferred that consumption during my working life. 

“And there are just too many people in this industry who don’t see retirement income in those terms, there are too many incentives for keeping that capital, passing it onto the next generation, fees are charged off that capital.  

“We are quite clearly going into an environment where investment returns as we know them are going to be severely challenged, so it’s a matter of the mindset change around spending the money. I hear all these debates at the moment, the so-called retirement trap and so-on that’s all framed on a world where you don’t spend your capital. Until we engage with that, I think we’re going to be in a world of hurt.” 

BT Financial Group’s general manager of superannuation, Melinda Howes, who hosted the panel, agreed that the low interest rate environment would drive retirees to “start dipping into that capital”.

Jeremy Cooper in 2009, when he chaired the Labor government’s Super System Review. (Getty)

According to Cooper, SMSFs already have a negative “net contribution ratio” of around 170 per cent as more money flows out of funds than comes in because they are further into the retirement stage than members of industry and retail funds. By 2030, he said the ratio would turn more negative as $18 billion is contributed to SMSFs and $40bn drawn down, but dismissed the idea that was a problem because “this is what retirement systems are supposed to do” and the overall pool continues to grow as the “mountain of capital spits off sufficient investment returns to keep topping the thing up”. 

Under current rules, once people start a pension their fund must pay out a minimum amount each year, varying depending on age up to at least 14 per cent for the oldest retirees. 

“I’d like to know what is actually happening to that money,” said Cooper, the chairman of retirement income at Challenger. “Of course, people who absolutely need to are spending it, but I think a lot of other people are hoarding it and again that’s just something we’re going to have to engage with.” 

Michael Blomfield, the chief executive of research house Investment Trends, said people’s nest eggs should be at least “90 per cent finished by the time you’re finished”, but the challenge in solving the issue – other than ensuring the market has good advice, and the right regulations and products – was that it’s an inherently “scary moment”. 

“The day you spend the first dollar of that nest egg, is the toughest of all of them and if people are not confident about long they’ll live and how much they’ll need etc etc, then it feels like that day I spend dollar one of whether I have 250,000 or $2m, that’s the scariest day of all and that’s what the adviser needs to assist with,” he said. 

The trouble is, half the number of people getting advice when the FOFA reforms were introduced in 2013 are now getting advice, he said, leaving huge swathes of the population not getting advice, partly due to the increased cost of regulation and compliance. 

“This constant change, this micro adjustment and macro adjustment, it’s got to stop,” Mr Blomfield said of the regulatory environment. 

While the planned increase of the superannuation guarantee workers receive to 12 per cent by 2025 has dominated the headlines, SMSFs will no doubt take up a decent part of the retirement review panel’s time. 

Over the past decade, SMSFs have grown into the largest part of Australia’s $2.9 trillion piece, more than 600,000 SMSFs making up almost $750bn in assets at the end of 2019, according to The Association of Superannuation Funds of Australia. In addition, Cooper pointed out that the average mortality rates among SMSF members are also “dramatically lower” than the general community, predicting that by 2030 life expectancy for males and females in the space would grow to a seasoned 91 and 92, respectively, or 95 for the survivor of a couple.

Michael Rice, the executive director of Rice Warner, predicted SMSFs would continue to grow to around $1 trillion by 2030. He said they’re increasingly become “intergenerational vehicles” as people with very large SMSFs “bring their children in”, noting that it’s “quite easy then to draw out $100,000 tax free and put it in as a non-concessional contribution for their kids”. 

So, given the cost of super tax concessions to the federal budget and mixed views on how much it reduces the cost of the age pension, how do we sculpt the ideal super system to fit inside the ideal retirement income system?  

Blomfield aptly summed up the difficult starting point, noting the nation still wasn’t clear on “why we have a retirement income system”. He said the review must go beyond super to get several other parts of government aligned toward a common goal, including the tax system, the social security system, the aged care system and the health system.  

“My description of the Australian system is it is a brilliant world class accumulation system that is really pretty crap at retirement,” he said of super. 

Over to you Retirement Income Review. 

The views expressed are those of the author and do not necessarily reflect those of the Westpac Group.

The information in this article is general information only, it does not constitute any recommendation or advice; it has been prepared without taking into account your personal objectives, financial situation or needs and you should consider its appropriateness with regard to these factors before acting on it. Any taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual situation may differ and you should seek independent professional tax advice. You should also consider obtaining personalised advice from a professional financial adviser before making any financial decisions in relation to the matters discussed.


Michael Bennet was inaugural Editor of Westpac Wire from June 2017 to December 2021. He joined Westpac after more than 12 years in journalism, most recently at The Australian as the national newspaper’s banking reporter based in Sydney. Michael has worked at various News Corp publications and other media companies covering industries including financial services, resources, industrials, markets and economics. He is originally from Perth, Western Australia, where he also wrote across magazines covering the arts with a focus on music.

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