In Australia, people at retirement have DC pots, there is very little DB and the state pension is means tested. How you draw your DC pot down determines your income in retirement for most Aussie savers. We aren’t there yet, but it’s the direction of travel in which we’re heading and for many people who have DC and no DB, what Australia is struggling with, is what they are struggling with.
The Australian Government has decided that people need help with finding the right rate at which to drawdown savings.
In retirement, projection tools (like ASIC’s and many super fund calculators) are typically designed to assume you draw your super balance down to ZERO by a particular age (like 92). But this approach has MAJOR problems:
- Your balance is assumed to reduce down to zero – as per the chart on the left.
- BUT: your remaining life expectancy does NOT reduce down to zero like this! E.g. For retirees who survive to age 91, their average life expectancy isn’t one more year. For males it’s still another 5 years on average.
Basically, as you get older, the simple act of not dying means you move each year into a group with a higher average lifespan. See the chart on the right ! These calculations are based on the Australian Life Tables 2015-17 with 25-year improvement rates. Healthier and wealthy retirees typically live even longer than these population averages. And couples get two shots at beating the average!
This is why the government keeps pushing super funds to implement lifetime income products – where you cannot outlive your money. With these products you don’t really care what your ‘balance’ is in retirement, as you’re contractually entitled to receive retirement income every year for life – no matter how long you live. Even if they cure cancer and we all live to 200. Investment-linked versions pass on the investment performance too.
This morning , on Pension PlayPen, Professors Andrew Clare and Stephen Thomas will be looking at drawdown as a viable model for the UK mass market. I will be asking them to comment on the Australian experience and whether an entitlement to receive income every year , is what people really need.
Against Andrew and Stephen will be Mark Ormston, who will be arguing the case for annuities, a product that does give a lifetime guarantee.
Currently we don’t have an investment linked annuity, where the income you receive is based on market returns and not the gilt-yield. I’ll also be asking whether investment linked annuities are likely to arrive in the UK , as they are in Australia.
Is it time for a Retirement Income Review in the UK? That’s my third question!
Thanks to my friend Jim Hennington for content for this blog.
Here’s Jim and his boss David Orford arguing it out on Linked in