Australia consults on annuity measures to stop pot depletion

Australia is consulting on forcing people to convert all or part of their superannuation benefits into an income stream that provides protection against inflation and longevity risk.

An interim report published yesterday by the Murray Review team, which is carrying out an investigation into Australia’s entire financial system, found a quarter of peoplewith a superannuation balance at age 55 have depleted it by age 70.

The review, chaired by former Commonwealth Bank chief executive David Murray, calls for views on whether the Australian government should “provide policy incentives to encourage retirees to purchase retirement income products that help manage longevity and other risks”.

The report comes days before the UK government is expected to set out its response to George Osborne’s Budget announcement on pensions freedom that would bring in similar freedoms to those introduced in Australia 22 years ago.

The report also found half of superannuation benefits in retirement are paid as lump sums, with approximately 44 per cent of those that do using the money to pay off housing and other debts, to purchase a home, or make home improvements.

A further 28 per cent use their lump sum to repay a vehicle or holiday loan or to purchase a holiday or new vehicle. The number of households entering retirement with debt, particularly a mortgage, is increasing, the report says, concludes that the ability to use superannuation lump sums to extinguish debt can encourage higher pre-retirement consumption and borrowing.

The inquiry has called for a new round of submissions on how Australia could better meet the challenges of an ageing population, such as by providing incentives to encourage retirees to purchase retirement income products that help manage longevity and other risks, or forcing people to convert all or part of their superannuation benefits into an income stream that provides protection against inflation and longevity risk.

The report says: “The lack of effective risk management, particularly longevity risk management, is a major weakness of Australia’s retirement income system.

“Australia is unusual in neither mandating nor encouraging the use of income streams with longevity protection in retirement.

“The retirement phase of superannuation is underdeveloped and does not meet the risk management needs of many retirees. There are regulatory and other policy impediments to developing income products with risk management features that could benefit retirees.

“The taxation and social security systems could be used to create strong incentives for retirees to take superannuation benefits as income streams that help manage longevity risk. There are already tax settings in place to encourage superannuation benefits to be taken as income streams, but these streams are not necessarily longevity protected.”