Post-COVID-19 revival: alternatives to spending superannuation
With some 2.7 million people applying for early access to super, financial advisors need to consider more efficient and effective delivery modes to assist individuals in need of unbiased advice, writes UNSW Business School’s Anthony Asher
Can – and should – we be encouraging people to spend their superannuation money? The question is particularly relevant now. Most obviously it applies to the Early Access to Superannuation relaxation of rules that has permitted those facing reduced income to make withdrawals up to $20,000. Should they take the money and spend it now, or would it be better to leave it and spend later it in retirement?
Less obviously, the same question applies to those who already have access to their superannuation (those aged over 60). The point is that the policy of lower interest rates is intended to drive up the prices of all assets – including house prices – in the hope that their greater wealth will drive people to spend. There is an impact on spending, but not as great as we would like; it would be great for the underemployed if retirees with money spent more of it.
It would, however, be irresponsible to suggest that people spend their money now if that means that they would be reduced to poverty later. So the question needs to be refined: we should not encourage people to spend their superannuation until they know how much of their superannuation they can afford to spend. How much can one afford?
How much superannuation can be spent?
To answer this you need to do some complex calculations: projecting income and investment returns and deducting expenses from now until the end of life. If you are mathematical you can do it on a spreadsheet, but unless you have a thorough understanding of investment returns, inflation and life expectancy you could fall into a number of traps. You can ask a good financial advisor to do the calculations and explain it to you. It is costly however, not least because they will need to spend hours collecting information. They need to know your family unit’s assets and liabilities, income and spending patterns.
But collecting this data is waste of time, because it is all in the computers of the ATO or other government departments. They probably know more about your finances than you do – or at least have access to. What is required – and this was hinted at by the Financial Systems Inquiry as long ago as 2014 – is for the data to be made available in a standardised form to financial planners.
Not surprisingly, there are financial planners who have asked if the ATO can provide them with the data. I believe it could even be downloaded directly into online calculators by the ATO. I have worked on draftfinplancalc.com, which shows that with the appropriate data, one can produce saving and insurance recommendations for simpler situations. The role of financial planners would then be to explain the output. In simple cases, this could be done less than an hour.
Investing in life annuities
Good advice might discourage people from spending too much or too little, so would not necessarily be good for the COVID recovery. The introduction of more lifetime income products (life annuities) would however encourage more spending. This is because they redistribute money from those who die to the survivors, so there is no need to hold back money that will go to heirs. The fact that few people seem to want to invest in life annuities can be referred to as a puzzle.
One explanation of the puzzle is that there are a number of important misconceptions about lifetime annuities. The first is that they must give poor fixed interest type returns – not true as they can be linked to equities or other more profitable, and riskier, investments. The second is that they offer poor value for people in poorer health – not true because it is possible to give a better deal to people with lower life expectancies.
But the introduction of appropriate annuities faces other obstacles, chief of which may be biased advice. Recent evidence from the UK, suggests that the effect of biases in financial advice goes a long way to explain why people do not buy life annuities in spite of their benefits.
The context is that life annuities used to be compulsory for those retiring from pension funds, but four years ago the UK government proclaimed “pensions freedom”. Retirees could take the present value of their annuities as a lump sum, and in spite of the need to pay additional tax, about half of the retirees have taken the lump sum. This is easy to explain as 90 per cent of these have been for amounts less than £30,000, and the annuities would have been small. Surprising, however, is that 80 per cent of the rest have taken drawdown products (like our allocated pensions) rather than life annuities.
The need for good, unbiased advice
A closer analysis however finds that there is a significant difference between those who consulted a “professional” financial advisor and those who either obtained disinterested “guidance” from the government provider, or who took no advice at all. Those not consulting professional advisors were between three and four times more likely to take a life annuity, rising to eight times more likely for those with the largest annuities.
There are many possible reasons, but must surely ask whether is perhaps the self-interest of the some advisors and their employers who set the parameters within which the advisors operate. Once you have a life annuity, there is little need for future advice. With a drawdown product, there are ongoing questions about how much you can spend and where to invest. So not only the advisors but the investment managers have the opportunity to keep on charging.
The need for good unbiased advice has increased in these uncertain times, at a time when the advice industry is in a state of flux. Perhaps there are possibilities to move towards more efficient and effective delivery modes.
Anthony Asher is Associate Professor and Acting Associate Head of School (Education) in the School of Risk & Actuarial at UNSW Business School. He also serves as Director of Research – Business for the Centre for Law, Markets and Regulation. For more information read The Dialogue: Leading the conversation (Actuaries Institute) or Investing Superannuation for the Public Good (The McKell Institute) or contact Associate Professor Anthony Asher directly.