4th February 2009
The Age Pension - Is it enough?
'Global financial crisis' - it has become a common term in our everyday communication. It has affected everyone from large corporations, governments, small businesses, families and individuals. Whilst it is a global problem, at home in Australia it is affecting many different industries and our community is feeling the impact with subsequent job losses and the very real possibility of more to come. Whilst history has taught us that the markets will eventually recover and the economy will correct again (which could take some time), what does this mean for Australian retirees or those nearing retirement?
Experts suggest that much of the strangle hold on our economy is 'investor sentiment'. Therefore, what is the perception and opinion of Australian investors of the current market situation and 'global financial crisis'?
It has been suggested that the age group that has the greatest impact on 'sentiment' is the 50-65 age group.
Why is this group considered to have the greatest impact?
- It is the group most affected by the global financial crisis as they are retirees, near retirement or investors.
- 70% of this group influence real estate transactions.
- They are affected by the possibility of retrenchment and have less prospects for future re-employment.
- They have the greatest influence and focus on re-employment, superannuation etc.
There has been much debate, which has been highlighted in previous articles, even more so in the last 18 months, about the grey lines between superannuation savings and the Age Pension.
Firstly, there is a misconception that the Superannuation Guarantee (SG) Contribution was created to replace the Age Pension, and that the Australian government would eventually phase out the Age Pension. In our view, this is not correct and in fact the intention of the SG contributions is to supplement the Age Pension.
Catherine Nance, director of PriceWaterhouseCoopers (PWC) commented in a recent financial article that projections showed approximately 80 per cent of the population will still rely on a government-funded Age Pension when they retire. She believes the focus should be on how to make sure that the right Age Pension will be available come retirement. This is even more pertinent in a market like the one we are experiencing currently. What protection, if any, do retirees or nearing retirement Australians have?
There are a number of different strategies some of which include:
- Visit a Financial Planner and arrange a retirement strategy - Your planner will help you ascertain how much you will need in retirement to live comfortably and also meet your retirement expectations e.g. holidays, help the children or grandchildren, renovate the family home etc. Most individuals do not realise that to achieve your retirement goals you need to start saving very early in your working life.
- Defer the Age Pension age in line with demographic shift and overseas trends - 'deferring retirement' was also a suggestion from the Australian Government late in 2008 when many retirees' funds were subsequently 'frozen'.
- Have more flexibility around the 'Age Pension Age' (the age that the Australian Government determines that you are considered to be 'retired' and have access to your superannuation savings). There has been a demographic shift in the age people retire. Many people do not work continuously until age 65 as many cycle in and out of the workforce to pursue other interests, so the government should review the current savings structure and encourage a 'lifetime savings system'.
Another suggestion has been 'longevity insurance' products, where people can pay a premium to ensure that their retirement savings will last their retirement. Many 'old life insurance products or financial products' catering exactly for this type of situation have since been removed from the market place as 'unpopular' or are available only to restricted areas of the work force.
Another example of a financial product that has fallen out of favour is the defined benefit superannuation scheme. In basic terms the value of your retirement benefit is defined by the fund rules and usually depends on:
- How much money gets paid in?
- How long you have worked for your employer?
- How much money you are earning when you retire?
For example, your benefit might be worth five times your final salary after 25 years' membership.
One advantage of defined benefit is even if the fund's investment performance is poor, your employer must still ensure the fund can deliver the benefits due when you retire.
Most superannuation plans available in the market place today are Accumulation Funds. Therefore 9% of your salary is contributed (SG contribution) to your superannuation and the balance is 'accumulated' over the years and invested in various investment options. The risk with accumulation, which many retiring Australians have experienced in late 2008 and around the time of September 11, 2001, is that your superannuation savings are linked directly to the market and is therefore exposed to market volatility. Even if it is invested in conservative or cash based options, there is still some potential for loss.
Guaranteeing bank deposits and providing 'cash bonuses' may stimulate a recovery in our economy, or may not as it appears to have been the case after the $10.4 billion cash injection from the Government pre-Christmas. Maybe a 'Superannuation Balance Guarantee' for retiring or retired Australians may potentially be a better spend for our Government. Especially given that experts believe the 50-65 year olds have the greatest influence on our economy.
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Head of Funds Management
t +61 3 8610 2811
Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.
La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.
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