Treat pension as retirement income stabiliser

The age pension should be considered as a Government backed annuity with regular inflation linked increases that provides some protection against market volatility, inflation and longevity risk according to Lonsec Research and Milliman.

In a research paper released this week titled "How much is the age pension worth?" the two groups state that when combined with investments that are non-affected by investment returns or inflation the age pension provides little value beyond a regular income component for the retiree.

However when those factors are included the pension has an 80 per cent change of adding to the total lifetime income of the retiree according to the research paper.

The pension is able to perform this function as it acts as a stabiliser and provides a floor against sequencing risk while still allowing retiree investors to benefit from the upside of markets according to the report which states the downside protection of the pension is independent of any upside participation in the market.

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In a case study included in the paper using a single, 65 year old male with $500,000 in superannuation and a desired retirement income of $40,000 per annum the pension would be able to add an average of $300,000 of additional income to age 90.

The report stated this was a variable figure but "our modelling suggesting an 80 per cent chance of the age pension adding between $16,000 and $580,000 to total lifetime income depending on the nature of the market environment that occurs during this individual's retirement".