Why your super fund will short-change you in your retirement and how it could be different
THERE’s only one Australian superannuation pension fund that pays a pension the way pensions are paid elsewhere in the developed world.
That would be a pension that continues no matter how long you live. It would also be a pension that doesn’t lose its value.
Pension funds are called superannuation funds in Australia, which hides that they are not doing what they are supposed to be doing: pay a lifetime, inflation-proof pension.
Instead, most superannuation funds offer to pay you an ‘account-based pension’, which is no more than a bank account: you decide how much you withdraw and when.
Your fund refuses to worry about whether your super money will last you a lifetime and as to inflation, you work it out!
It obviously suits superannuation funds to run their business in this way.
What tends to happen now is that retirees take out of their super savings as little as possible because they’re worried about running out of money.
This suits superannuation funds just fine.
So, Australian super funds are not going to offer a lifetime, inflation-proof pension unless they are made to.
Enter the Australian Government and its Retirement Income Covenant.
Consultation has been ongoing for five years to “encourage” superannuation funds to provide genuine retirement income products to their members.
But the best the Retirement Income Covenant could come up with was to require funds to have a Retirement Income Strategy. No requirement to offer a lifetime, inflation-proof pension.
This Retirement Income Strategy is to guide retiring superannuation fund members how to go about formulating and executing their retirement income plan.
Most people have been disengaged from superannuation during their working lives.
Magically, these intending retirees will gain from this Strategy the ability to decide on how they are going to use their super savings and maximise their income.
It’s like asking an airline passenger, who has been having drinks and nibblies since take-off, to step up to the flight desk and land the jet they are travelling on.
The one superannuation fund in Australia to offer a lifetime, inflation-proof pension to its members is QSuper.
This is not an endorsement of their product, and this is not financial advice to buy their product, but here’s more or less how it works.
It is designed to ensure you, or your estate, get back what you put in regardless of how long you live.
The money is pooled and invested in a low-risk way.
The money-back death benefit is funded by QSuper taking out insurance.
Every year, the pension payment for the next year is either increased or reduced based on the investment return. If the return is more than 5 per cent, expect a pay rise next year. If less than 5 per cent, expect a cut.
Incomes are expected generally to rise over time, ‘inflation-proofing’ your pension.
Once you buy in, you can’t cash out.
After you have received your nominal purchase price as income, no death benefit is payable.
Unlike a fixed-income-for-life annuity available outside regulated super funds, this is variable-income-for-life.
Obviously, if the Government forced other superannuation funds to offer retirement income products that ensured inflation-proofed retirement income for life, there would be healthy competition among funds.
That would benefit you, not your fund.