Planning for retirement is one of the biggest financial challenges that Australians face.
While the superannuation system is designed to provide a steady income in retirement, many retirees struggle to navigate their options.
One possible solution gaining attention is setting up an annuity within your superannuation. But is this the right move for you? Let's take a closer look.
The complexity of retirement income
The Grattan Institute argues that Australia's superannuation system is too complex for retirees, leading to unnecessary stress and poor financial outcomes. Many retirees end up being net savers rather than using their superannuation as intended, effectively turning the system into a large-scale inheritance scheme rather than a tool for providing retirement income.
Unlike many other countries that automatically offer retirees a lifetime income, Australian retirees receive little guidance on how to use their super.
While key decisions about contributions and investments are made during their working lives, retirees are often left to figure out how to manage their savings, the age pension, and investment risks on their own.
The problem with account-based pensions
The Grattan Institute notes that most retirees in Australia use account-based pensions, which require them to manage their spending carefully to avoid outliving their savings.
However, this approach has significant drawbacks.
According to its research, half of retirees draw their super at the legislated minimum rates, leaving 65% of super balances unspent by the time they reach their average life expectancy.
Furthermore, account-based pensions are less regulated than superannuation products for working Australians, which means that retirees may not always receive the best value for their money.
Could annuities be the answer?
The Grattan Institute highlights that annuities offer a potential solution to these challenges.
An annuity provides a guaranteed income stream for life, reducing the risk of running out of money in retirement. It suggests that the Federal Government should encourage retirees to use a portion of their super to purchase an annuity, ensuring a stable and predictable income.
Under this proposal, retirees with more than $250,000 in super would be guided—by both the government and their super fund—to use 80% of their balance above this threshold to buy an annuity. The remaining super could then be drawn down via an account-based pension, allowing for some flexibility. It explains:
This reform could boost retirees' incomes by up to 25 per cent, while also ensuring that the bulk of retirees' incomes, irrespective of their super balances, would be guaranteed to last the rest of their lives. Retirees remaining super would be drawn via an account-based pension, giving them flexible access to capital.
Should you consider an annuity?
While annuities provide financial stability, they may not be the best fit for everyone.
Those who prefer greater control over their money or who have other sources of income might find account-based pensions more suitable. Additionally, annuities may come with fees and restrictions that could limit flexibility.
Ultimately, whether you should set up an annuity in your superannuation depends on your individual circumstances, risk tolerance, and ultimately your retirement goals.
Given the complexity of retirement planning, speaking with a financial adviser is a good step before making any major decisions. Especially ones that could impact your golden years.
