Similar to other countries, Australia operates a three-pillar retirement income system. This three-pillar approach has been pursued by the Government for the last few decades.
Despite changes over the years to each of these pillars their core aims remain intact.
Essentially, the three-pillar approach consists of the following:
Pillar 1: Means-tested Age Pension (publicly funded). This pillar aims to ensure Australians can meet a minimum standard of living in retirement. It is a safety net for those who don’t have enough super or other financial resources behind them to generate a reasonable minimum retirement income.
Pillar 2: Compulsory superannuation. This pillar aims to improve the adequacy of retirement income to allow Australians to achieve a standard of living in retirement above that afforded by sole reliance on the Age Pension.
Pillar 3: Voluntary savings, including home ownership. This pillar provides flexibility to save more for retirement than what is required under compulsory super. Tax concessions applying to voluntary savings provide opportunities for individuals to set aside additional savings. This is important especially for those not covered by Super Guarantee such as the self-employed and those on a career break to catch up on saving for retirement. Voluntary savings may allow individuals to achieve a higher standard of living in retirement than those solely reliant on the Age Pension and compulsory super.
Retirement Income Review final report
The Government recently released the Retirement Income Review final report — an independent review of the performance of Australia’s retirement income system. It provides a fact base of the current system in the context of an ageing society. Its purpose is to improve understanding of the operation of the system and the outcomes it delivers to Australians. The Review identifies:
- how the retirement income system supports Australians in retirement
- the role of each pillar in supporting Australians through retirement
- distributional impacts across the population and over time
- the impact of current policy settings on public finances
Below, is a summary of several excerpts* from the report’s key observations section:
- The system is complex. Adding to this complexity is the interaction with other systems, such as the aged care system and the tax systems. There is a need to improve understanding of the system.
- Complexity, misconceptions and low financial literacy have resulted in people not adequately planning for their retirement or making the most of their assets when in retirement.
- As at June 2019, around 71% of people aged 65+ received Age Pension or other pension payments. Over 60% of these were on the maximum rate.
- For most households aged 65+, the family home is their main asset. Super makes up a small share of their net wealth. This will change as the super system matures.
- Compulsory super allows people to achieve a retirement income that better reflects their pre-retirement income. As the super system matures, people will increasingly fund more of their own retirement.
- Voluntary super provides the flexibility for people to save more than is mandated by the Super Guarantee (SG). It also provides an opportunity for those not covered by SG to make super savings.
- Super savings are supported by tax concessions for the purpose of retirement income and not purely for wealth accumulation. Yet most retirees leave the bulk of the wealth they had at retirement as a bequest.
- Saving for retirement involves forgoing consumption in working years. With voluntary saving, people decide on this trade-off. When there is compulsory super, the SG rate should be set at a level that balances pre-and post-retirement living standards.
- More efficient use of savings in retirement can have a bigger impact on improving retirement income than increasing the SG rate.
(Retirement Income Review final report, 2020, pp.17-20)
Moving forward and how an adviser can help.
It’s important to recognise that everyone has their own financial situation, goals and objectives, which also means our ideas and expectations about retirement can differ.
Therefore, in terms of securing your own retirement wellbeing and security, consider taking a proactive retirement planning approach as there are things within your control, which if acted upon can affect the final outcome.
Importantly, we can help point you in the right direction with an appropriately designed roadmap aligned with your personal circumstances and provide you with a helping hand along the way.
Excerpts from the article republished with permission from: www.Shartruwealth.Financialknowledgecentre.Com.Au
Any information provided in this article is general advice only and does not take into account the investors’ objectives, financial situation or needs. Before acting on this general advice, investors should therefore consider the appropriateness of the advice having regard to their objectives, financial situation or needs.