Fear of outliving assets in retirement is lowering the standard of living of many Australian retirees, according to a hard-hitting report that policymakers in the UK need to consider as they finalise details of major pension reforms. With the UK set to give retirees greater choice about how they take pension benefits, the Australian report offers a clear warning that greater flexibility is no guarantee of better outcomes because it leaves people on lower incomes and facing more risks. It suggests pensioner incomes could be 15 to 30 per cent higher if retirees were encouraged to make better use of products that pool longevity risk.
Stephen Lowe, director at retirement specialist Just Retirement, said that report into the Australian financial system, named after its author David Murray, should be required reading for all UK policymakers keen to create a more sustainable system focused on providing pensioners with what should be their top priority – generating income in retirement. “The evidence from Australia is that if the pension system is not focused on generating income then it leads to poorer outcomes for pensioners. People end up saving more than they need to during their working lives then taking less when they retire, and even then they
can’t be sure it will last as long as they need it.”
He said that Australian retirees, who tend to be risk averse and worried about running out of money, will tend to hoard their cash in case they need it later. Even though people have access to take lump sums from pensions if they wish, they are too scared to take the money and spend it.
The report says: “An individual with an account-based pension can reduce the risk of outliving their wealth by living more frugally in retirement and drawing down benefits at the minimum allowable rates. This is what the majority of retirees with account-based pensions do, which reduces their standard of living.” It recommends that Australia develop guaranteed lifetime income solutions that allow its retirees to manage longevity and investment risk more effectively, giving them the confidence to spend the money in their accounts without worrying. It also suggests that the pensions system should have ‘default’ options that encourage people towards solutions that better manage risks.
“A key message from the Murray report is that people are focusing more on taking care of their pot of money than they are on taking care of themselves,” said Stephen Lowe. “It recommends that when they retire they should be ‘nudged’ towards products that tip the balance back in favour of having more to spend during their own lifetimes. “I think we have a lot to learn from the report in the UK because we are about to introduce a system which puts even more responsibility on individuals, not just allowing them to take
money when they want it but to hoard it when they ought to be using it to enjoy their later lives.”
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