Retirement revolution

After you’ve clocked up a few years in the workforce, those fantasies about driving off into the sunset seem to come up a lot more frequently.

But if the Federal Government has its way, Australians could be putting those retirement dreams on hold for a few more years.

Rather than downing tools, the Government hopes people will take advantage of the new Transition to Retirement (TTR) regulations and stick around for a bit longer.

While the experts see the new rules as part of a raft of changes aimed at offering more flexibility to those retiring, they are also quick to point out that they provide some great opportunities for building superannuation balances and saving some tax along the way.

According to Macquarie Adviser Service head of technical services David Shirlow, the rationale for the new regulations is to facilitate people moving gradually into retirement.

“The Government introduced it to enable people to wind back their level of work and supplement their income from a pension,” he says.

Association of Superannuation Funds of Australia (ASFA) chief executive officer Philippa Smith believes the new rules are a valuable innovation.

“The regulations will take a while to be bedded down, but they will have an impact,” she says. “Where this is an option, it will be a good change.”

Smith sees the new rules as a smart move by the Government.

“This is a very appealing public policy and a good public policy,” she says.

“It works on two levels — psychologically and financially. A lot of people are aware that work provides a level of engagement and they don’t want to give that away in one step.

“This fits with the psyche of what people want to do — phase down their work and phase up the other things they want to do.”

Who will benefit?

Although there are no estimates yet on the number of people likely to take advantage of the new rules, the experts believe they will have an impact.

“It is a fairly significant change all up when you look at all the ways people can use it,” Shirlow says. “But it is not clear the extent to which it will be used.”

Principal of Miranda Financial Centre Michael Langtry believes many clients will welcome the new rules.

“It will be very attractive for some people. In some situations it can be a way out,” he says.

TTR will be particularly helpful in situations where there is a lifestyle or personal need for part-time work, for example when clients cannot work part-time and meet their financial commitments or have a caring role and need to reduce their hours.

“They can’t access a lump sum, but this gives them time off to handle these issues and still work,” Langtry points out.

Shirlow agrees TTR will be useful as a way of covering ongoing living expenses for those looking to fund a partial retirement.

He expects the new rules will be particularly popular in workplaces where part-time work is common, such as the public sector.

However, all this assumes you intend to retire at some stage.

The latest figures on labour force participation released by the Australian Bureau of Statistics (ABS) in February show that of the 3.7 million people currently in the labour force aged 45 years and over, 10 per cent never intend to retire.

When to retire?

While there are obviously some hardy souls keen to stay on indefinitely, the new regulations are unlikely to encourage many people to delay their retirement too much.

In 2004-05, the average age at retirement for those aged 45 and over who had retired in the past five years was 60.

When quizzed about when they intended to retire, the average age nominated by those still working that knew when they intended to retire was 62.

If the Government is hoping the new regulations will entice people to stay in the workforce longer, it may be disappointed.

The ABS figures show the most common factors influencing retirement decisions are personal health or physical abilities (40 per cent), financial security (36 per cent), and reaching the eligible age for an age or service pension (15 per cent).

The ABS statistics show that among men and women whose last job was less than 20 years ago, 37 per cent ceased work due to reasons outside their control, such as sickness, injury or ill health (26 per cent), or being retrenched, dismissed, or having no work available (11 per cent).

Even the experts believe the new regulations will have little impact on retirement ages.

According to AMP director of savings and retirement Peter Nicholas, retirees have different motivations for leaving work, with some influenced by health issues and others wanting to continue working as long as possible due to a lack of finance.

On the other hand, he believes “baby boomers are generally keen to retire as soon as they can afford to”.

Smith agrees there are various motivations for retirement, with reaching preservation age being only one of them.

“Retirement age is due to a number of different factors such as access to savings, health, the attitude of your employer and whether the job is interesting to you,” she says.

Employer attitudes

If the new regulations are to have an impact on retirement age in Australia, employers may have to change their attitudes.

ABS figures on retrenchment, dismissal or lack of available work among retirees indicate that the decision to retire is often made for older workers.

As Smith notes: “Employers will have to get over their age prejudice.”

She is in no doubt that prejudice exists in the workplace, but believes employers will be forced to change in the next decade because of the sheer weight of demographics.

The new rules will make it easier for employers, employees and superannuation funds to accommodate workers on reduced hours, explains Smith.

“Previously, it was difficult to determine whether a person was able to save through superannuation as the 10-hours test could not deal very well with contract or intermittent work,” she says. “This makes it easier to continue saving.”

Encouragingly, Mercer Wealth Solutions is finding its large corporate clients are showing real interest in the new regulations.

According to Mercer chief financial adviser Bronwyn Speed, employers see the rules as a way to hang on to senior executives, rather than losing them completely to full retirement.

“The response from employers is that they are very interested in this and how it works,” she says.

Impact on savings

Although there has been speculation that the new regulations could discourage Australians from saving into superannuation if they believe they can work past retirement, the general opinion is that this is doubtful.

Shirlow believes people are unlikely to save less and says a bigger issue is that by allowing people to draw down on their superannuation earlier, they will be “eating into their savings”.

“A high proportion of people who take a transition to retirement pension will have taken advice, and that will have to focus on the need to ensure they have sufficient funds for their eventual full retirement,” he warns.

While Smith acknowledges there is a possibility people may see the option of continuing to work as a way around insufficient savings, she believes it is a risky strategy.

“It may work for some, but for blue-collar workers where their main skill is their physical health, it would not be suitable.”

Nicholas believes that the “spend, spend, spend” attitude of baby boomers could see them saving less in the expectation of working on, but this will be balanced by their “self-indulgence” and desire to retire as soon as possible.

“We will have two competing forces, and it will be interesting to see how it plays out over time,” he says.

Tax benefits

In fact, some experts believe the tax benefits available through the new rules may encourage people to put more into superannuation.

As Nicholas points out, for younger clients the rules represent “a real opportunity to make a difference to their retirement income”.

Shirlow is another who feels the biggest beneficiaries of the new rules are not those considering partial retirement but, rather, people still saving for it. By channelling taxable income into superannuation through salary sacrifice, income tax can be reduced and savings increased.

“For some categories of people this will be an efficient way to build retirement savings,” he notes.

This is likely to include middle to high-income earners who already have considerable savings in superannuation and employers willing to permit salary sacrifice.

Speed agrees, noting “there are major tax ramifications if you can salary sacrifice”.

She points to the advantages of paying 15 per cent contributions tax versus high marginal income tax rates, particularly when coupled with the new super spouse splitting rules.

Combining these two strategies is generating enormous interest, Speed says.

“It’s very attractive if you are not paying income tax but only contributions tax, and are accruing additional wealth in superannuation. There are also other benefits such as being able to even out the capital amounts for the two partners.”

However, advisers need to ensure the cost of implementation is considered, particularly given the shorter timeframe over which the strategy can be used, she warns.

Nicholas also sees the new rules as a major opportunity to get more money into superannuation and even gain access to other benefits such as the co-contribution and spouse rebate.

“There are a number of free kicks with this,” he says.

New opportunities

While the calculations may be time-consuming, Speed believes the new rules will make retirement planning easier.

“There are now more technical tools available to advisers,” she says.

Shirlow believes that although some planners will view the new rules as an additional complication, they in fact represent a valuable opportunity.

“From the financial planner’s perspective, it is an opportunity to add a significant amount of value in relation to income strategies from a much earlier age,” he says.

“It gives financial planners more flexibility and enables them to get involved in income streams from an earlier age.”

Nicholas agrees: “For advisers they provide the opportunity for earlier engagement. There are tremendous opportunities … to develop strategies over time.

“The earlier the conversation about retirement strategies is had the better, as at the moment retirees are often not talking to a planner until their actual retirement date.”

Speed also welcomes the chance to discuss retirement with clients.

“Retirement planning will take on a whole new meaning,” she says.

“It opens up massive planning opportunities.”

Structuring a strategy

In fact, Langtry believes TTR strategies need to be part of a holistic planning approach.

“This is a lifestyle strategy and a financial planning thing as well.”

He has already put several transition strategies in place and found that the clients who benefited the most were those that could access a tax-free income stream, such as someone with high, undeducted contributions. Otherwise, the tax bite can make the strategy less appealing.

While acknowledging TTR can be very attractive for some people, Langtry warns advisers that they will need to run several scenarios to ensure it meets a client’s needs.

“It’s technical. You usually need to run three or four scenarios to consider issues such as the tax, capital accumulation and Centrelink interrelationships,” he says.

Despite this complexity, Shirlow argues the new rules give advisers additional tools to finetune a client’s income once they actually retire.

“I think advisers more than ever have an opportunity — and the responsibility — to get more involved in pitching income and savings needs to match living needs throughout retirement,” he says.

“Income levels are not now a ‘set and forget’ thing. Now advisers will have scope to revisit and revise income levels at various times during retirement.”

New retirement products

The flexibility in the rules is also likely to see new retirement products emerge, Nicholas notes.

“Baby boomers will demand lots of products to suit their needs, not only income paying ones but also products such as reverse mortgages,” he says.

“I see a fairly exciting future for the industry and lots of different options will be available that can be utilised.”

Some large providers and industry superannuation funds have already launched new products, with Macquarie introducing both a TTR allocated pension and a term allocated pension (TAP).

Late last year, MLC added a non-commutable allocated pension to its MasterKey platform and its MasterKey Custom Superannuation and self-managed superannuation products.

Industry funds have also acted, with Queensland-based industry fund Sunsuper launching a non-commutable allocated pension early this year.