The professional body representing actuaries is urging the Government’s inquiry into financial systems to recommend ways to make retirement income streams work better.

The Actuaries Institute says the current choices for retirees of lump sums, account-based pensions or annuities are not necessarily appropriate given the rapidly ageing population.

“We’re saying there’s a lot of moving parts that need to be looked at and we’re saying – and we agree with the FSI (Financial System Inquiry) – that there is no formal statement of guiding objectives for retiring income system, and that’s something we think needs to be fixed,” said the institute’s chief executive David Bell.

He says it is critical that Australia reforms its superannuation draw down system before withdrawals start equalling accumulators.

“We’re at the point that, in about 30 years time, if you look at the total pull of funds in the superannuation system, just under half will be in the draw down phase,” Mr Bell forecast.

“What has happened to this point is there’s been a lot of focus on the accumulation phase, which makes sense, but now we think there needs to be focus on the retirement phase and the draw down phase.”

Shift towards annuities needed

There are concerns that many retirees are taking a lump sum and splurging early in retirement, so that they can access part or full pensions to live off later on.

Mr Bell says that is not sustainable, and defeats the purpose of super, which is to reduce the strain on the aged pension.

“There is evidence that people are increasingly doing that, which is not a healthy thing, both for the individual and for the community as a whole,” he said.

“So what happens is that if people run out of money, then obviously they’re in a difficult situation and the community and the taxpayer has to pick that up.”

Mr Bell says that is largely because there are few incentives for people to take out annuities in the Australian pension system.

“If you look at the proportions of people who take a lump sum or an account-based pension versus those who take an annuity, the number is 96 per cent to 4 per cent,” he said.

“So in Australia, relative to the rest of the world, our take up of annuities is very, very low.”

Reverse mortgage risks

The reverse mortgage industry, which allows retirees to tap into equity in their homes to maintain their lifestyle by taking out a new loan secured by their real estate, spends a lot of advertising dollars targeting retirees.

Mr Bell says the sector needs to be more carefully monitored.

“There is now a lot of discussion about whether or not home equity represents a substantial additional pool of savings, which could be viewed if you like as a fourth pillar of retirement funding and, yes, we certainly think this is something that can be looked into,” he said.

“There’s a lack of knowledge, people aren’t really aware of how these products work, and we think that’s something some focus can be provided to.”

Mr Bell says retirees need to be made fully aware of the financial implications before they reverse mortgage their home.

“It’s very important that older Australians should not be forced to sell their homes. There’s also potential impacts on your pension eligibility if you release funds in your home,” he said.

“So it’s certainly something that has to be treated extremely carefully if you’re considering taking one of these products up.”

These ideas have been raised in the institute’s submission to the Financial System Inquiry, with second round submissions closing today.