Posted in: Wealth Management Administration
Earlier this month, the Australian government announced that it is to ‘enshrine in law that the objective for superannuation [a private pension system similar to the UK’s auto-enrolment] is to provide income in retirement to substitute or supplement the Age Pension’.
Given that Australians have enjoyed for nearly 25 years’ pension freedoms similar to those launched in the UK last year, this might seem like a backward step. Rather than continuing to allow individuals to use their pension pots as they wish in retirement, the Australian government has stated they are now specifically seeking to reduce the use of superannuation for tax minimisation and estate planning purposes.
So why now? Similar to the UK, Australia faces the challenge of an aging population, with a growing number of pensioners compared to workers. Unlike in the UK’s auto-enrolment where both employees and employers must contribute and there is an option for employees to opt-out altogether, Australian superannuation is compulsory for employers while employees are encouraged, but not required, to made additional contributions.
When it was first introduced in 1992, employer contribution rates were set at 3 per cent of an individual’s salary and these have steadily increased to 9.5 per cent today and will continue to rise incrementally to 12 per cent in 2025. This compares to a combined employer and employee contribution rate of currently 2 per cent in the UK, rising to 5 per cent in 2018 and 8 per cent in 2019 (subject to parliamentary approval).
Australian superannuation was introduced with three aims: to provide adequate levels of retirement income, relieve pressure on the means-tested state pension and increase national savings in order to create a pool for investment. In recent years the Australian government has becoming increasingly concerned that despite the level of saving, pensioners were running out of money in old age and falling back onto the means-tested state pension.
In 2014, the Murray Review into Australia’s financial system supported this fear, finding that around 50 per cent of people took their money out as a lump sum at retirement age and a quarter of that group exhausting their funds by the age of just 70. While earlier this year, the Centre for Independent Studies found that the Australian state pension, known as the Age Pension, cost nearly a quarter of all income tax revenue in the last financial year.
Even after nearly 25 years of compulsory pension saving and with the fourth largest investment fund market in the world thanks largely to pension funds, the Australian government is concerned that a continued increase in Age Pension payments would place unreasonable pressure on the country’s economy. Tightening the rules around how pension funds can be spent and tax concessions for larger contributions, while introducing new measures to encourage saving for those with low balances will, they hope, improve the sustainability of the superannuation system.
So what can the UK learn from the Australian experience? First, we all need to be aware of how much we income we will need in retirement and how quickly savings can run out. The proposed pensions dashboard should help individuals understand what their finances will look in retirement like and hopefully encourage increased savings.
And second, having at least a portion of guaranteed income for the duration of your retirement is extremely valuable and gives peace of mind that there is a regular source of money. Recent stockmarket volatility following the UK’s decision to leave the European Union illustrates the need to consider how external events could impact saving plans that do not include an element of guaranteed income. New products that combine annuity, income drawdown, investments and cash also offer UK pensioners greater choice and flexibility in their financial planning.
The UK government is moving responsibility for pension provision away from the state and onto individuals. As we’ve seen in Australia, that responsibility is not one to be taken lightly; aspiring Lamborghini buyers beware.