New analysis shows our ‘lump sum culture’ is an exaggeration

Linda Elkins

More than $80 of every $100 paid as a retirement benefit is taken as a pension, refuting the accepted view that Australia has a strong ‘lump sum’ culture.

The Colonial First State Income Stream Index, launched yesterday, measures the percentage of retirement assets taken as income streams rather than lump sums. For the 2014 financial year, the index shows 83.3 per cent of retirement assets were taken as income streams.

This contrasts with the widely held view that around half of all benefits are paid as lump sums.

“This analysis suggests that Australians’ reliance on lump sums in super is an exaggeration and adds a new dimension to the debate about compelling Australians to take an income stream in retirement,” said Linda Elkins, Executive General Manager Colonial First State.

“Australians are generally looking to the long term to fund their lifestyle in retirement. This is a sign of a maturing system, where – through good education and advice – people are becoming more and more self-reliant,” Ms Elkins said.

“It supports the principles outlined in the Financial Services Inquiry that balance the desire to increase systemic efficiency in providing retirement incomes with a degree of individual freedom and choice.

“As the largest provider of account-based pensions in Australia, Colonial First State has vast experience in this area. The index is consistent with our observations of our account-based pension clients, who tend to be conservative and sensible in how they manage their retirement income,” she said.

Research author, Michael Rice, Chief Executive Officer of Rice Warner, said the data showed a stronger preference for income streams as balances grew.

“We estimate that as the superannuation system matures, 96 per cent of all retirement assets will be taken as income streams by 2025,” Mr Rice said.

“The data shows the system is generally working well. The question is not so much about whether Australians use income stream products in retirement but whether they are using the right income streams. This is certainly the emphasis of the recommendations in the Financial Services Inquiry final report,” he said.

The Colonial First State Income Stream Index is derived from Rice Warner’s analysis of its comprehensive dataset, comprising information from more than 10 million member records representing more than $55 billion in assets. The index will be updated annually.

According to the report, around one-third of accounts are taken as full lump sum payments, with the rest taken either as pensions or as part-pension and part-lump sum. Of the people who opt for lump sums, Australian Bureau of Statistics data (2013) suggests they tend to use them productively: one quarter invests in their own home, 18 per cent reinvest as ordinary money and 13 per cent reinvest into another retirement scheme.

The index shows that only 30 per cent of accounts with balances of $50,000 or less are taken as pension rollovers. 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 in all fund types, including Self-Managed Super Funds (SMSFs), more than 91 per cent of accounts are taken as pensions.

By gender, around 75 per cent of retirement benefits paid to men are taken as pensions, while it’s around 71 per cent for women. This does not include payments to SMSFs members, in which a very high proportion of men and women take their benefits as pensions. In retail funds, around three-quarters of all retirement payments are paid as pension payments, while in industry funds it is around two-thirds.

By State, excluding SMSFs, a higher proportion of retirement assets were likely to be paid as pensions to people in the ACT (74 per cent), Victoria (71 per cent) and NSW (69 per cent). By contrast, only half of retirement assets in the Northern Territory were likely to be paid as pensions. In Western Australia and Tasmania (both 62 per cent) and Queensland (63 per cent), the proportion of retirement payments paid as pensions was also below the national average.