Annuities are for everyone and they’re a retirement product with a future

The time has come to offer retirees a set income for life through annuities and it could be done with the help of Australia’s Future Fund.

To simplify retirement, we recommend that retirees be encouraged to use some of their super to buy a simple lifetime annuity, which offers people regular payments for life.

For the more than 200,000 Australians who retire each year, superannuation offers the promise of a comfortable retirement. Yet many retirees are not enjoying the full benefits of their super.

Most people find retirement planning stressful. Four in five Australians approaching retirement find planning for it complicated.

And few retirees ever draw down on their retirement savings. Many are actually net savers – their savings continue to grow for decades after they retire.

Our latest report, “Simpler Super: Taking the stress out of retirement”, shows that many retirees find the super system too complex, which stops them from making the most of their savings.

At retirement, the default option offered by super funds – and therefore what the vast majority of people take – is an account-based pension, which requires retirees to manage their spending to avoid outliving their savings.

But an Australian woman aged 65 today can expect to live until 88, and has a one-in-five chance of making it to 94. How can retirees plan what they can spend each year when faced with such uncertainty? It’s no wonder so many find retirement planning stressful.

Australia is an outlier in asking retirees to plan for retirement without that protection of an income that lasts as long as they do. What’s more, half of those retirees who use an account-based pension draw their super at legislated minimum rates. Yet drawing at the minimum will leave the typical retiree with 65 per cent of their super unspent by the time they die.

To simplify retirement, we recommend that retirees be encouraged to use some of their super to buy a simple lifetime annuity, which offers people regular payments for life.

Grattan Institute retirment income expert Brendan Coates.

Specifically, the government should encourage retirees to use 80 per cent of their super balance exceeding $250,000 to buy an annuity. Retirees who follow this recommendation could boost their incomes by up to 25 per cent, compared to solely drawing on an account-based pension at minimum rates.

And the best part: you don’t have to worry about running out of money. You can plan your spending knowing that most of your income is guaranteed for life, along with any age pension you’re entitled to.

Retirees would draw their remaining super balance via an account-based pension, giving them access to capital to renovate the house, for emergencies, or to help the kids to buy a home.

Steering retirees into annuities offered via their super fund is unlikely to work.

Twenty years ago, there were more than a dozen active providers of lifetime annuities in Australia. Today, there is only one – Challenger.

Many people struggle to understand annuities. And annuities are typically “one-shot games” – a retiree typically cannot switch to a better deal if they see one. Recent experience in the UK showed when required to purchase an annuity, most people simply took what their fund was offering and often got a poor deal.

It’s true that several super funds now offer their members the option of investment-linked annuities, which offer an income for life, but the level of income varies with investment returns.

But many of these products are incredibly complex: even experts struggle to decipher what retirees are being charged in fees and other costs.

The best option, therefore, is for the government to directly offer annuities. It should offer all retirees a simple lifetime annuity as the baseline option, as well as the option of investment-linked annuities for those who are happy to take on more investment risk.

Priced fairly, and managed by the Future Fund, a government annuity would give many retirees confidence they’re getting a good deal.

A government annuity could front-load the income it pays out, to reflect the fact that retirees tend to spend more in the early years of retirement, and less later in life.

A government annuity could even offer a money-back guarantee, where if you die before receiving the purchase price back in fortnightly payments, what’s left goes to your beneficiaries.

For many, a government annuity would offer the promise of a more comfortable and stress-free retirement.

Brendan Coates and Joey Moloney are retirement income experts at the Grattan Institute.