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Making retirees richer the old-fashioned way

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While the Abbott government has been looking at ways to wean more Australians off the aged pension, the UK government has revealed a plan to encourage some Brits to rely on it more heavily.

The plan will allow some Brits to top up their pensions with additional voluntary payments. In so doing, the government is effectively selling state-provided annuities, which offer exceptional value to retirees, according to The Telegraph newspaper’s personal finance editor Richard Dyson.

He notes:

You can’t make the transaction till October, but it will be such a good deal for so many people that I make no apologies for writing about it now …

Given that the income is inflation-proofed and offers a half-pension to your spouse on death, you’d have to pay around twice that sum for the same benefits if you bought an annuity from an insurance company.

The plan might seem an odd thing for a conservative government to do, particularly when considered alongside the Abbott government’s plans for reducing reliance on pensions.

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To rein in the increasing cost of the state pension, the Abbott government last year tried to reduce the rate at which pensions were indexed. Had that measure not been blocked in the Senate, it would have reduced the value of the pension as a proportion of average wages over time.

The government is also promising not to touch superannuation tax concessions – which are supposed to incentivise all Australians to save more for retirement, but which are mostly enjoyed by higher income earners.

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And the Abbott government is lowering the amount savers can have in assets before losing their part-pensions. All three measures reflect a view that the state pension, like many welfare-state policies of the post-WWII era, should be relegated to the dustbin of history as quickly as possible.

Labor, which created the current super system, also believes that the market does a better job of investing people’s retirement savings.

Its main points of difference from the Coalition are that it wants the super guarantee to be increased to 12 per cent of incomes as soon as possible, and it doesn’t want to use a diminished pension as an ‘incentive’ to put more into super.

So if our two major parties agree that the private savings system must take over from the state system, how can the UK Tories be selling pension top-ups?

The answer is mainly political, not economic. A major change to the UK pension rules mean that anyone qualifying for a pension after April 6, 2016 will get about £35 a week more than those who retired before that date.

So the government is offering to take a chunk of a retiree’s savings in return for boosting their weekly payments – an extra £25 a week will cost a 65-year-old £22,250, though the size of this up-front payment diminishes for older pensioners.

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Now this all sounds very academic – it would never happen in Australia, right? Surely we’re moving away from the state pension as anything more than a ‘safety net’ for those at the lower end of the socio-economic scale?

Actually, it is far from academic. On Wednesday, cross-bench senators Jacqui Lambie, Glenn Lazarus, Ricky Muir and Nick Xenophon joined with think tank The Australia Institute to call for an expansion of the pension system, funded by reverse mortgages secured against retirees’ homes.

Jacqui Lambie with Treasurer Joe Hockey. Photo: AAP

That is not an annuity scheme – annuities are partly insurance products, because they tend to offer an income ‘for life’, meaning that those who die early ‘lose’ money, and those who live a long time do better.

The reverse mortgage plan proposed by the crossbench senators does not function that way. Rather, it runs down the equity in a retiree’s home over time by lending the owner money at a cheap, government-backed interest rate.

So if you start with a home worth $1 million, and live 20 more years, the government might get half the home’s value when it is sold as part of your estate. But if you lived only 10 years, the government would have ‘lent’ you less, and so would get far less back when the home is sold.

The link between this scheme and the UK scheme is that it uses the government’s enormous balance sheet, and robust credit rating, to safely offer attract terms that an insurance company or other reverse mortgage provider could not.

Bizarrely, this scheme already exists for wealthy home-owners who are not eligible for the pension. Called the Pension Loan Scheme, it has existed for 20 years and currently lends money at a cheap 5.25 per cent.

What the crossbench senators want is to open the scheme up to other retirees – thereby using the massive store of equity locked up in homes to make the state pension an attractive retirement income option.

While the chance of either side of politics taking up this proposal looks slim, it’s a reminder that when you have an ageing population to house, feed and care for, ideology can quickly be overtaken by political forces.

And the crossbench senators have clearly noticed that although many retirees can’t do much with their meagre incomes, they can still vote.

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