Can SMSFs be the model to help change retiree spending habits?
Retirees with SMSFs are bucking the trend when it comes to spending their retirement savings.
At a superannuation lending roundtable on Wednesday, the industry heard that the majority of Australian retirees are reluctant to draw down on their retirement savings due to a lack of confidence that doing so provides a reliable income.
The latest APRA figures show that in the first quarter of this year, about $23.7 billion entered the super system via contributions, just under the $24 billion that was withdrawn by retirees. Investment earnings for the quarter were $77 billion, making the system as a whole cash flow positive.
But according to figures from KPMG, withdrawals are larger among SMSFs and retail funds with $14.8 billion withdrawn from SMSFs in 2022.
Treasurer Jim Chalmers said following the roundtable he would issue a discussion paper canvassing problems with financial advice, customer service and retirement income strategies.
“Half of retirees draw down the minimum and, on average, people who draw down the minimum will still have about a quarter of their super remaining when they pass on,” Dr Chalmers was quoted as saying in The Australian Financial Review.
“What that really means is people are living more frugally than they need to. There’s not enough confidence in their balances, there’s not enough diversity or flexibility in products in the market or literacy or advice or strategies to match people with these products.”
Wattle Partners director Drew Meredith said a lack of financial literacy and education contributes to the majority of retirees not wanting to spend their superannuation.
“The financial services and superannuation sector has been focused almost solely on investment and supporting the growth of accumulators who are entering or part of the workforce,” he said.
“There has been limited, if any, investment into education on retirement, outside of a few resources, which means the basic understanding of superannuation for most Australians, let alone retirees is very low.
“The lack of education and understanding has meant that many entering retirement simply have no idea how long their capital will last, nor how much they can reasonably spend without having a major impact on this.
“The result is a default to what the government says is an ‘appropriate’ amount which in reality is aimed at ensuring super balances are reduced to zero in someone’s 90s.
“Put simply, most retirees aren’t empowered or informed enough to know how much they can really spend.”
He said in his experience retirees with SMSFs are more confident about their retirement plans because of the control they have over their investments.
“But this extends to other more transparent options,” he said.
“Having relied on a regular income for their entire careers, the thought of a single pool of capital delivering a passive income can be terrifying.
“While many SMSF trustees outsource investment decisions, the ability to see, and in many cases predict and control the level of income received each year offers greater confidence to spend at any given time.”
He said a discussion paper is a great start, but the issue seems to be a generational one.
“The retirement income covenant has done little to change the focus of the superannuation industry, which continues to benefit and thus focus on investing consistent super guarantee contributions,” he said.
“In our view, the more media and coverage that is focused on retirement, the better. That said, the industry will always be slow-moving.
“Most importantly, investing and spending retirement requires a complete change of approach from what much of the industry does today. The switch from deploying capital, to having a finite pool of capital requires a change in mindset and even a level of re-education across the industry.”
