Retirement Income Review: Preserving capital always paramount

The Retirement Income Review offers some highly contestable assumptions about how Australians might finance their retirement, but suggesting very rich retirees should be denied tax breaks is not one of them.

It’s time to find a way to eliminate misuse by that fraction of the population using the loophole.

The Retirement Income Review offers some highly contestable assumptions about how Australians might finance their retirement, but suggesting very rich retirees should be denied tax breaks is not one of them.

So, let’s get that out of the way first: It is now clear that about 11,000 people mostly in Self Managed Super Funds – out of a total SMSF population of more than 1.1 million – are exploiting the system with more than $5m socked away. Fair enough, it’s time to find a way to eliminate misuse by that fraction of the population using the loophole.

Now to the more relevant issue of how the system is to be run for the vast majority of older Australians.

According to the review: “A major misunderstanding is the view that ‘retirement income’ involves the return from investing superannuation balances rather than drawing down those balances to fund living standards in retirement.”

But there is no misunderstanding out there among most Australian self-directed investors, rather there is an active refusal to consider super income as something you drain from accumulated capital. Longevity risk is a clear and present danger for most older investors. Exposed to the rollercoaster of investment markets, the need to preserve capital will always be paramount.

It’s this determination to live off the income produced by savings that unleashed the outrage against the opposition’s ill-fated plans to make changes on franked dividends.

In the same vein, it’s not that older Australians are unaware there is capital tied up in their homes: They know that, they are just particularly wary of jeopardising the security of owning their own homes in any way. These attitudes are entrenched because the system can pay more per annum to a couple on a full government pension than investment markets may return to a couple with $1m funding their own pension. This “black spot” in current arrangements undermines the review’s claim that we have “an effective, sound and sustainable” system.

Tapping into home equity is fine in principle and some will find comfort in doing so. But the range of products in the market is woefully inadequate. Yes, there is a government run Pension Loans Scheme – directly referenced by the report as “an effective option”. But the PLS is exceptionally limited in scope. If the government wants the scheme to be a truly effective option then it needs a complete overhaul.