Australian retirees with superannuation have cut the amount of money they are drawing from their pensions in a move that will leave them paying more money in fees over their lifetimes.
Figures from regulator APRA show that Australia’s retirees withdrew $110 billion from their retirement accounts in the year to March 2021 and cut this to $83.9 billion in the March 2022 year.
Given the total size of APRA regulated funds in both years it means that retirees cut their withdrawals from their super funds from 5 per cent in 2021 to 3 per cent in 2022. That probably happened as more retirees took advantage of the temporary halving of minimum super draw down rules that were part of the pandemic response.
There are two problems with that sort of action. One is it means people are living more frugal lives in retirement than they might otherwise be and the other is that it means they are paying more in fees to their super fund for looking after their money.
Ian Fryer, research chief with Chant West, said that because people go into retirement mode at the peak of their superannuation savings level it means that through retirement that will pay significantly more in superannuation fees than during their working life.
What do fees cost in retirement?
“While some estimates put the difference at as high as four times, if you factor in the inflation rate then you would pay about two times the level of fees in the retirement phase of super than you would during the accumulation years,” Mr Fryer said.
There is also a strong strand of thinking among retirees that they should live off the interest and dividends derived from their super rather than draw down against the capital they have invested after a lifetime of savings.
“We get people calling us every day to complain they can’t live on the interest from their term deposits and super,” said Paul Versteege, policy director with the Combined Pensioners and Superannuants Association. “If you point out to them that if they draw down on their capital they could have quite a nice life, they take the view that no- that’s just not on.”
By using their super savings to live on people would gain an extra advantage. “It would lower the fees they pay because those fees are charged as a per centage of your balance so the more you use the less fees you pay,” Mr Versteege said.
Part of the problem with the current system is that products in place to allow people to live off their capital into retirement is that they are badly designed.
“Annuities and products like that might make a lot of sense but the trouble is consumers hate them,” said Alex Dunnin, director of research group Rainmaker. Part of the reason they are unpopular is that many such products are generally not easily paid out to estates after death.
“If you drop dead tomorrow well the life insurance company [that created the annuity] keeps most of the money and people don’t like that,” Mr Dunnin said.
While the recently legislated Retirement Income Covenant may “prompt us to start thinking more about this stuff,” it does not present a clear pathway forward to push funds to develop new products. Rather it generalises about the need for super funds to develop such products, Mr Dunnin said.
There is a lack of understanding among many retirees about where their retirement money comes from. Many believe that is is something that is built up over their working lives which the above research demonstrates is not true.
If inflation is taken into account about one third retirement spending was saved during a working life and another third is earned from returns on super investments during working lives. That leaves just over one third actually earned from returns on super investments during retirement years.
So what should you do?
A sensible drawdown strategy would see money taken out of super over time with the knowledge that your money will still earn returns in pension mode that will go some way to restoring your fund balance over your retirement years. That means your super will last longer than you might have expected.
While the extra fees you pay on your fund will not overly erode your retirement savings you need to think about what you are paying. “The average administration fee on a super fund is about 0.3 per cent and the investment fee is about 0.7 per cent,” said Mr Fryer.
The average balanced fund returns over the last 10 years have been around 7.8 per cent, Mr Fryer said. So fees might cut a per centage point off that.
There is pressure on the downside with fees with major industry fund Rest just reducing its admin fee to 0.25 per cent on a $50,000 balance, a fall of 0.02 per centage points.
While that is not too bad it pays to check to see what the fees charged for your fund in pension mode are. If they are above the figures quoted by Mr Fryer, which are average for an efficient fund, then think about switching to one with lower fees.
The other thing to do is make sure you spend some of your super to enjoy your later years and don’t let the idea that you cannot spend capital ruin your retirement.
The New Daily is owned by Industry Super Holdings