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Retirees draw on super slowly, don't blow the cash

Nicki Bourlioufas  |  11 Aug 2016Text size  Decrease  Increase  |  

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More Australians are opting for pension payments rather than withdrawing their super in a lump sum, and the trend is set to continue.


Retirees are increasingly choosing to access their superannuation through income streams rather than lump sums, and the trend will only continue, with more than one in four Australian retirees drawing a pension from their superannuation funds, official figures reveal, with the average withdrawal at $502 a week.

According to the Australian Bureau of Statistics (ABS) and research house Rice Warner, more and more Australians are opting for pension payments rather than withdrawing their super in a lump sum.

Just over one in four people aged 65 years and over (28 per cent, or 876,000 people), reported receiving regular income from superannuation in 2013-14. This was higher than in 2003-04 (20 per cent, or 479,000 people), according to new research from the ABS.

Bjorn Jarvis, the program manager of the ABS' Labour and Income Branch, said almost 1.2 million people were receiving an income stream from their superannuation in 2013-14, at an average of $502 per week.

Moreover, the number of people with some superannuation and the average value of their accounts have both grown in the 10 years to 2013-14. In 2003-04, around two-thirds (64 per cent) of people aged 15 years and over had superannuation. By 2013-14, this had risen to 71 per cent.

For people with superannuation, the average value of their accounts had increased in real terms to $110,000 from $68,000 over that 10-year period.

Over time, it would be expected that as people's superannuation savings increase, their reliance on government pensions would decrease.

However, in the 10-year period to 2013-14, there was no significant change in the proportion of superannuants 65 years and over receiving 50 per cent or more of their personal income from government pensions or allowances.

"This highlights that government pensions are still an important source of income for superannuants post retirement, though this is likely to change as more people are covered by superannuation for all of their working lives," the ABS said.

"It is also useful to note that a large proportion of the total wealth of older Australians is invested in their home, which is not included in means testing for pensions."

But the ABS could be understating the proportion of people taking their super as income streams rather than lump sums.
According to research house Rice Warner, people with bigger superannuation balances are more likely to take their super as an income stream--and that trend will only continue as the population ages.

Rice Warner has conducted detailed analysis of payments from a number of superannuation funds representing over 9 million members and found that over the year to June 2014, 28 per cent of superannuation accounts with balances of $50,000 or less are taken as pensions.

However, for balances between $50,000 and $100,000, the split between accounts taken as lump sums and those taken as pensions is roughly even. For balances of more than $300,000, almost 87 per cent of accounts are taken as pensions.

As the superannuation system matures, 96 per cent of all retirement payments will be taken as income streams by 2025, predicts Rice Warner.

"The results categorically showed that the majority of retirement benefits are taken as income streams at retirement," says Rice Warner. 

"Further, we are often told retirees spend their money quickly to fall back on the age pension. In fact, those who have account-based pensions are generally conservative about spending their money. The average amount taken as pension payments each year is about 7 per cent (of super balances)," said Michael Rice, CEO of Rice Warner.

A Productivity Commission research report, Superannuation Policy for Post-retirement, released in October 2015, also found that most superannuation benefits are now taken as income streams.

Less than 30 per cent of superannuation benefits are taken as lump sums, with most superannuation benefits taken as income streams.

Where lump sums are taken, they are most frequently used to pay down debt, invest in income stream products, and purchase durable goods that are used throughout retirement.

"While the use of lump sums attracts much attention, the suggestion that their use is problematic is not supported by the available evidence," the Productivity Commission said.

The chart below reveals the most popular uses of lump sum payments in 2012-13 was to invest in residential property--either to pay off the family home or to fund home improvements or the purchase of a new property (at 25 per cent).

This was followed by investing the money elsewhere such as in a term deposit (at around 17 per cent), closely followed by people rolling over the money or investing it in an annuity or super scheme.

 

chart

 

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Nicki Bourlioufas is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind.

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