Actuaries Institute proposes pre-set pension for retirees

Actuaries Institute has proposed a three-part package to tackle Australians missing out on tax-free income by not transitioning their superannuation to the retirement phase when eligible.

Under the proposal, all APRA-regulated super funds would be required to offer members aged 65 and over a pre-set account-based pension, a new income product 'MyIncome'. Members would be free to choose if they want to accept the account.

"We do not have a retirement income system. Australia's well-respected superannuation system has helped millions save for retirement. Now we need an equally effective mechanism for delivering that income," co-author of the paper David Knox said.

It further recommends any super balances remaining in the accumulation phase be automatically transferred to pension phase at 75, when an income would commence. Knox said age 75 is chosen as members can no longer make voluntary contributions to super from that age.

To support this transition, Actuaries Institute suggested super funds begin collecting members' bank account details to facilitate future pension payments from the time the member turns 60.

In its dialogue paper It's Time: Here's How to Turn Superannuation into a Retirement Income System Actuaries Institute estimates $326 billion of retirement wealth is "stranded" in the accumulation phase of super.

The paper found around 1.5 million Australians are leaving their superannuation untouched after age 65, reducing their available income and costing them over $2 billion each year in tax.

HESTA recently put out research stating Australians missed out on up to $13.5 billion in tax-free investment returns between 2017 and 2025 by not transitioning their super to the retirement phase.

"We need to normalise drawing an income from super so more people can live with dignity in retirement," co-author of the paper Nick Callil said.

"The process for accessing a retirement income is too complex so many people simply build up assets in super rather than using them in retirement as intended."

Knox said the system struggles with a broader structural gap as applying for an income stream requires retirees to make detailed financial decisions around asset allocation and drawdown amounts, complete additional forms and verify their identity.

"Importantly, our proposal gives super funds the flexibility to design account-based pensions to suit their members and continue to engage with them," Knox said.

"Funds know their members best and we want them to continue developing solutions that deliver the best outcomes for their members."

The proposal estimated this package will potentially deliver higher retirement incomes and tax savings. It will allow assets to move from accumulation phase, where investment earnings are typically taxed at 15%, to pension phase where earnings are generally tax-free.

"These policy suggestions are intended to improve overall retirement outcomes while leaving space for innovation and competition between funds," Callil said.

"It should be easy for Australians to access the savings they have worked so hard to accumulate, but the stranded balances issue shows we need to do more," Knox said.