Welcome to Pacific Advisory

Managing your finances together

Australians should factor in the age pension when looking at their projected retirement income, according to leading global professional services firm, Towers Watson.

“Superannuation Guarantee increases notwithstanding, the age pension will continue to provide a safety net in retirement,” said Andrew Boal, Managing Director for Towers Watson in Australia.

Currently, around 50 per cent of Australians of ‘age pension age’ receive the full age pension. According to the federal government's Intergenerational Report, released in 2010, this is expected to drop to around 30 per cent in 40 years' time.

"But a lot of retirees will continue to be eligible for at least a part age pension for some time,” said Boal. “At the moment, around 80 per cent of Australians of ‘age pension age’ receive either a full or part age pension – and in 40 years' time this is expected to still be above 75 per cent."

The Intergenerational Report stated the cost of the age pension for the year 2009-10 was 2.7 per cent of GDP. By 2049-50 this is forecast to rise to 3.9 per cent of GDP.

"When you look at all government spending on individuals, including disability support, unemployment benefits, family tax benefits and child care benefits as well as the age pension, the current cost to government is 6.9 per cent of GDP," said Boal.

"In 40 years' time, this is forecast to still be 6.9 per cent of GDP. Because of the demographic shift to an older population, age pension costs will increase, but there are expected lower costs for other welfare measures such as unemployment benefits, family tax payments and child care payments."

As an example, a single person with a low superannuation balance (around $100,000-150,000) would need to fund only a relatively small amount each year from their superannuation savings to maintain a 'modest' standard of living as defined by the ASFA Retirement Standard, which is $22,000 per year for a single person.

The current full age pension sits at $19,468 per year (including the supplements) for people whose total assets (excluding the family home) are less than $186,750.

"So, a single person only needs an additional $2,500 each year to reach the ASFA 'modest' level," said Boal.

"Of course, reaching the much higher 'comfortable' level on the ASFA Retirement Standard (or $40,000 per year) will require much higher levels of contributions from their superannuation and personal savings."

"It is very important for most people to take into account the impact of the age pension when assessing how much super they need. It would be really helpful if funds sent their members an annual projection statement showing their expected superannuation savings at age 65, and how much income this would be expected to produce after taking into account their likely age pension amount as well."

Retirement costs continue to increase

We are talking to clients about new figures released today by the AFSA Retirement Standard indicate a couple looking to achieve a ‘comfortable’ retirement will need to spend $55,316 a year, while those seeking a 'modest' retirement lifestyle need to spend $31,767 a year.

A ‘comfortable’ retirement lifestyle is broadly defined as enabling an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as; household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel.

Meanwhile a ‘modest’ retirement is characterised by an income that is better than the Age Pension, but still only able to afford fairly basic activities.

The updated figures follow the trend of the last several quarters as the amount needed by retirees to fund their post-work lifestyle continues to increase. The aggregate costs for a couple living comfortably in retirement were up by 0.7 per cent in the September quarter 2011 from the June quarter 2011. The increase in costs over the quarter for retirees was similar to the 0.6 per cent increase in the All Groups Consumer Price Index (CPI).

Retiree households on average have somewhat different spending patterns to the rest of the population. Along with generally owning their own home outright (so cost increases for housing are less important for retirees), they don't tend to spend as much on education services. In contrast, food, health, transportation and recreation spending form a large part of retiree budgets.

Between the June quarter 2011 and the September quarter 2011, retirees had a 0.2 per cent decrease in the cost of food but over the year to the September quarter, there was an increase of 6.4 per cent. The decrease in the cost of food between the quarters was due to falls in the prices of fruit and vegetables owing to seasonal factors and favourable growing conditions. The annual increase is influenced by the cost of bananas increasing nearly four-fold over the six months to June 2011 due to shortages created by Cyclone Yasi.

The cost of water and sewerage services rose by a substantial 8.6 per cent in the quarter with property rates rising 5.2 per cent. Electricity costs rose on average by 7.8 per cent, reflecting substantial price increases in a number of states. Transport costs were little different between the quarters with an increase in the cost of motor vehicle servicing offset by a fall in the price of petrol.

The prices of leisure goods and services rose by 0.9 per cent between the quarters, with the cost of overseas holidays increasing by 5.1 per cent. The fall in the price of health services reflected a fall in pharmaceutical prices with more individuals benefiting from the Pharmaceutical Benefits Scheme safety net.

Australia's retirement savings system rated most sustainable

We know our retirement savings system is one of the more advanced globally and now Australia’s pension system has been named the most sustainable in the world in the 2011 Pension Sustainability Index (PSI) produced by Allianz Global Investors.

The news comes just one month after another international retirement pensions index – the Melbourne Mercer Global Pension Index - saw Australia climb to number two in the rankings.

Allianz, one of the world’s largest asset management companies, publishes the PSI annually to measures the pressure on governments across the globe to reform their pension system. The PSI uses a wide range of sub-indicators, such as demographic developments, public finances and pension system designs. Taking all these sub-indicators into account, Australia’s pension system received the lowest score and is considered to be the best prepared for the future.

Brigitte Miksa, Head of International Pensions at AllianzGI, said that Australia has “a two-tier system of lean public pensions and highly developed funded pensions which means it is best prepared with respect to potential burden for public finances, thus, it is under the least pressure to reform.

Australia's continued success in both indices is down to its sophisticated funds management sector, which in turn is underpinned by its federally mandated retirement savings scheme.