Retirement Reform or Risky Gamble? The Case Against Government-Backed Annuities— by Noel Whittaker

By April Bradford

Today at 11:33 AM
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Noel Whittaker is the author of Wills, Death & Taxes Made Simple and numerous other books on personal finance. Email: [email protected]

For over a decade, successive governments have grappled with the challenge of creating a retirement income system that serves most retirees well. Currently, retirees face two main choices: drawing a pension from their superannuation fund or opting for a lifetime pension such as an annuity. Both have drawbacks. Relying solely on superannuation exposes you to market volatility while converting part of your super into a life pension sacrifices flexibility and a significant portion of capital.

The ‘right’ way to use retirement funds? Image Credit: Shutterstock

The government also believes many retirees live too frugally, largely due to ingrained habits and a fear of outliving their savings. A step in the right direction to encourage retiree spending is the relatively new lifetime income stream product. Its key incentive is the 40% exemption of the purchase price from the pension assets test, offering asset-tested pensioners a 3.1% annual boost to their pension. However, this provides no benefit to self-funded retirees.

The left-leaning Grattan Institute has joined the debate with a proposal for the government to offer all Australians a government annuity that guarantees a lifetime income. Their recommendation goes further, suggesting retirees be encouraged to allocate 80% of their super balance above $250,000 into this government-backed annuity. According to their analysis, such a reform could boost most retirees’ incomes by up to 25%.

Consider a couple with $750,000 in super. Under the Grattan proposal, they would be encouraged to invest $400,000—nearly 54% of their liquid capital—into a lifetime income stream. This would leave them with a lump sum of just $350,000.

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