Retirees keeping their super in savings: Research

Australian retirees are holding onto their superannuation and only spending the government mandated minimum, according to research undertaken by the CSIRO.

Dr Andrew Reeson, research conductor and behavioural economist at the CSIRO, analysed large sets of anonymous data from the Australian Taxation Office and superannuation funds as part of the study.

He told SmartCompany Aussies appear to be playing it safe with their savings.

“People seem to be choosing to spend very conservatively even though actuarially they could probably spend more,” he says

Under taxation law, retirees must annually withdraw the minimum amount from super as a pension to qualify for the tax exemption on super investment earnings.

The minimum payment is 5% of the pension’s account balance for Australians aged 65 to 74 and 14% for anyone 95 and older.

Reeson says this pattern of minimum withdrawals is being observed across a broad spectrum of super balances, whether the balance of an individual’s super account is $100,000 or $1 million.

He says numerous factors might explain the reason for our frugal ways, including individuals wanting to be prepared for uncertain life events like medical expenses and longer life expectancy.

Other factors might include retirees wanting to have something to pass onto dependents like spouses and children.

Adam Stanley, head of investments at Pitcher Partners, is of a similar view.

“It’s a natural reaction in my opinion for people to be conservative with their spending of super on the basis they don’t know how long they’re going to live,” he told SmartCompany.

Stanley says products like annuities remove the fear of longevity, as they provide a guaranteed income stream.

However, annuities are more beneficial the longer you live and choosing a reversionary income stream that will continue to benefit a spouse or dependent if you die is recommended.

The CSIRO’s preliminary findings will be released in a formal report that Dr Reeson expects to be fast-tracked and released prior to this year’s federal budget given the “strong level of interest”.

Stanley says changes to the way superannuation is taxed are likely on the way.

“Everyone should be starting to plan for their retirement as early as possible because it’s a concessionally taxed environment it remains the best place to park your money,” he says.

“There will be changes to the current taxation regime in superannuation whether it’s this year or future years, changes will be coming.”

Since compulsory superannuation was introduced in 1992, Reeson says we are now beginning to see Aussies entering retirement with decent superannuation balances.

Many business owners choose self-managed super funds, although their spending habits are not too far from their counterparts in other funds, Reeson says.

“A lot of our data does cover self-managed super funds, I’m not sure the behaviours we’re observing are drastically different in those self managed funds … obviously the SMSF tend to be much larger but there’s good reasons for that,” he says.

Less than one fifth of retirees named superannuation, annuities or allocated pensions as their main source of income in 2013, according to data from the Australian Bureau of Statistics.

Reeson says this preference for saving over spending in retirement may have flow-on effects to the business community.

“Clearly frugality is never good for the small business owner, unless it’s the small business owner themselves being frugal, but at the same time the pool of savings from super is a great asset for the economy,” Reeson says.

After this report is delivered, the next step for the CSIRO will be conducting surveys and experiments into the reasons behind peoples’ superannuation decision making.

The Australian Superannuation system currently has $1.6 trillion in assets and is expected to grow to $7 trillion by 2033 and $11 trillion by 2040.