Regardless of where you are on life’s journey, good advice is always valuable.
Whether it’s buying your first car, your first house or preparing for retirement – getting advice can help validate your plans or steer you around pitfalls that others have fallen into.
When it comes to retirement there has been a lot of focus on encouraging people to save more, particularly with extra contributions to superannuation, and to answer the question, “have you got enough?”.
Without question the Australian super system is world class, particularly in its workforce coverage and savings rate (currently 11% and legislated to go to 12% by July 2025). The total industry numbers are impressive – $3.5 trillion, representing 142% of gross domestic product*.
What the super system has done well is invest and grow the retirement savings of the majority of Australians who don’t actively make investment decisions for their super.
The reform of the super system back in January 2014, when the (then) new default system MySuper started, meant that the majority of super fund members who did not opt to actively choose their super had their hard-earned dollars invested in diversified, lower-cost portfolios.
A minefield of regulations
Investment advice on asset allocation was effectively built into the MySuper default portfolios, and market returns over the past 20 years have been strong and fund members have benefited as a result.
But when you hit retirement age you are dealing with not just the super rules and regulations but how super interacts with social security and the taxation system.
And what may seem simple, straightforward decisions can have serious long-term consequences.
For example, a family friend just hit retirement age and wanted to convert his super from an accumulation to a pension account. This would allow him to start drawing down his super and take advantage of the zero tax rate on pension accounts. What he hadn’t realised was that converting to a pension account and starting an income stream triggered a different social security assessment with a significant reduction in a support payment he was receiving.
Some professional advice (from a pension specialist costing a modest $300) got things back on track, but it underlined the minefield of regulations that most Australians cannot be expected to be aware of, and that the super and social security systems do not interact as logically as you might expect.
So, if you are approaching retirement, where would you turn to for advice?
Market research reports regularly find that family and friends top the list of where people naturally go to for advice, but there are times we may need to turn to a professional instead to get the job done.
A professional adviser is a logical port of call for people, particularly when significant assets, a self-managed super fund, or a complex family situation are involved. Vanguard’s research continues to show the distinct value professional financial advisers can provide – particularly where needs are more complex.
But what about those with relatively simple financial affairs and a healthy but average super balance, who might baulk at the cost of a personal financial adviser starting at around $3,000?
Super is a two-part game
Super is a two-part game. Firstly, there is the accumulation part where money is put aside from earnings and invested on a concessional tax basis to help save for the member’s retirement. Retirement – or to use industry jargon, decumulation – is the second part of the equation.
This is where a recent thematic review by the Australian Prudential Regulation Authority (APRA) and the Australian Securities & Investments Commission (ASIC) into how super trustees are helping members enhance retirement outcomes suggests the industry can and should do better.
Super funds are a logical place to turn for retirement advice given they are already managing money on behalf of millions of Australians. A number of funds are already providing a range of advice services, from simple calculators through to limited intra fund advice offers, right the way up to referrals to external financial advisers.
Super funds are being urged to play a bigger role in providing members with advice, not just how to invest your super, but also how to draw it down in your retirement years.
The grey tsunami
From the regulators’ perspective this a matter of urgency. That’s not surprising when you consider our demographic profile and ageing population. According to Australian Bureau of Statistics data included in the Retirement Income Review the number of Australians over the age of 65 was 6.5 million in 2020. The just-released Intergenerational Report 2023 forecasts this number will double over the next 40 years.
A veritable grey tsunami. And a big increase in the number of people relying on their own pension or the government Age Pension, or some combination of both. In the APRA/ASIC review they call out that about 3 million Australians will become eligible to draw down their super in the next decade.
But while super funds know some key things about their members (account balance, age etc) there are other critical pieces of information necessary to develop an effective retirement income strategy.
Closing the gap
The regulators are calling out the need for super funds to gather more information on members. This highlights the gap between a comprehensive financial plan prepared by a professional adviser who has a detailed understanding of your household situation, any assets outside super and retirement goals, versus what a super fund can do with a more constrained information set.
Closing that gap will be the challenge for super fund trustees.
Robin Bowerman, Vanguard Australia