Much of the focus of financial advisers until now has been on helping people accumulate and manage their wealth ahead of retirement. But perhaps the most significant opportunity lies in supporting retirees to manage their retirement savings.
The first of the baby boomers are now a decade into their retirement and the rest of that cohort are moving through the early phase of retirement. Based on data from the Australian Bureau of Statistics (ABS), we estimate 700 Australians enter retirement each day, while ATO data shows around $70 billion is transferred from the accumulation phase of super to retirement each year.
At the same time, the variety of pension-style financial products is expanding. Product providers are increasingly focused on developing fit-for-purpose retirement income solutions that aim to help retirees maximise their income in retirement.
One recent example is the introduction of the market-linked lifetime annuity that combines the benefits of a lifetime income stream and exposure to investment markets. The market-linked annuity gives retirees a suite of indexation payment options, that can be reviewed annually, aligned closely to the five most commonly used risk profiles from cash through to balanced and growth options. This allows advisers to help their retiree clients manage and adjust their portfolio to their clients’ level of risk as needs change throughout retirement.
The requirements of the federal government’s Retirement Income Covenant (RIC), scheduled to apply from 1 July this year, will inevitably foster new retirement income options – both within super and for advised clients. While product development will take time, more choice in pension products will increase demand for high quality financial advice, making the role of financial advisers even more crucial in the future.
The RIC requires trustees of APRA-regulated super funds to develop a retirement income strategy for their members who are retired or approaching retirement. The aim is to assist members to maximise retirement income for members across the whole of retirement by managing retirement risks, specifically inflation, market sequencing, and longevity risk, and allowing some flexible access to capital.
Longevity risk, which is the risk that your retirement savings don’t last as long as you do, is unique to retirement and heightened by the fact that no one knows exactly how long they will live. The government’s Retirement Income Review highlighted that many retirees fear outliving their savings and underspend in response, leaving most of their super as an inheritance rather than spending it on themselves. This outcome is at odds with the purpose of superannuation – to provide income for spending in retirement.
The RIC has the potential to not only support better management of retirement risks, but to also drive more certainty for retirees, helping them to overcome the anxiety they have about outliving their retirement savings. In effect, it will encourage them to spend more confidently, rather than living frugally in fear of an uncertain financial future. This will help retirees to enjoy the retirement they deserve.
It will also promote increased client engagement. The RIC is holistic, highlighting the need for product innovation as well as education and tools. Retirees will be seeking to take advantage of the opportunities coming their way. Knowledgeable financial advisers play a key role in supporting their clients to manage financial risks, navigate the range of products, and develop strategies that deliver a more confident and enjoyable retirement.
Luke Cheetham, general manager retail distribution, Challenger
Neil is the Deputy Editor of the wealth titles, including ifa and InvestorDaily.
Neil is also the host of the ifa show podcast.
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