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February 9, 2011updated 13 Apr 2017 8:50am

Big flaws in Australia’s superannuation system

Australias superannuation (super) system is the envy of many countries struggling to come to terms with the pension needs of ageing populations But despite the A$1.3trn ($1.3trn) super industrys success, all is not well, warns super industry body Industry Super Network (ISN) in a study into the use of how older Australians are using their super funds The ISN noted that in modelling the adequacy of current retirement income policy, the Federal Treasury has for some time assumed that all retirement accumulations are invested at retirement in term or life annuities

By LII editorial

Chart showing Australian survey findings: Reasons not to invest in retirement income products (% of respondents)Australia’s superannuation (super) system is the envy of many countries struggling to come to terms with the pension needs of ageing populations. But despite the A$1.3trn ($1.3trn) super industry’s success, all is not well, warns super industry body Industry Super Network (ISN) in a study into the use of how older Australian’s are using their super funds.

The ISN noted that in modelling the adequacy of current retirement income policy, the Federal Treasury has for some time assumed that all retirement accumulations are invested at retirement in term or life annuities. In practice, however, the ISN’s study revealed that only a small proportion of super payouts are invested in these products.

For its study, the ISN surveyed 376 members of five major super funds. Of the respondents, 55% were male and 45% female. Respondents’ ages ranged from 50 to over 70, and 48% were retired.

The ISN found that the “overwhelming majority” of those surveyed did not make any significant investment in long-term assets, including pension products. However, the allocation to such assets did increase markedly with retirement savings.

Specifically, only about 12% of households with less than A$100,000 in retirement savings made any allocation to pension products, and in this savings range the allocation represented around 5% of assets on average. By contrast, around 45% of households with retirement savings of A$100,000 and over made some allocation to pension products, and the allocation represented 32% of their assets on average.

ISN’s study also found that large numbers of retirees across all levels of retirement savings used a significant proportion of their super payout for immediate consumption, repaying debt and short-term investments, including bank deposits.

Indicating a need for increased consumer education, the study also found that awareness of pension and income stream products was low at 45% of all respondents. However, awareness increased with savings level – 73% of those with $100,000 or more in retirement savings were aware of these products.

There is also a clear indication that financial advisers can play a far more significant role, with the study revealing that across all respondents only 27% had sought financial advice about use of their super payout. For those with savings of over $100,000, 41% had sought financial advice.

Clearly there is a strong risk that many Australian’s will end up with inadequate retirement savings. Specifically, the ISN believes that at least half of Australian’s are at risk of outliving their retirement savings and having to fall back on the state pension.

Unsurprisingly, the ISN is a strong advocate of increasing the minimum contribution to a super fund from 9% to 12% of wages. This is the stated objective of the federal government.

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