US report highlights need for annuitisation

A US report into Australia's retirement system has cited weak annuity markets as one of its failings.

The Centre for Retirement Research at Boston College assessed Australia's superannuation system to gauge what lessons could be learnt and applied to the pension system in the US.

Statistics showed that half of those who accessed their super fund in 2012 received a lump sum distribution, while 98 per cent of the rest chose a phased withdrawal product over an annuity the centre said.

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"This lack of annuitisation makes older Australians heavily exposed to longevity, inflation and investment risks," it said.

Australia needed reforms that encouraged innovation in annuity product development to reduce the burden on the age pension by reducing people's ability to "double dip", according to the report.

Recent proposals to reform tax concessions for deferred lifetime annuities will remove the main hurdle, according to Towers Watson's Australia managing director Andrew Boal and The Actuaries Institute's chief executive Melinda Howes.

The Federal Government announced earlier this month it planned to extend concessional tax to deferred lifetime annuity products.

Boston College said the propensity for Australians to ‘double dip' due to the means-tested age pension was a system flaw and that could be exacerbated by increasing super balances, despite the planned increase to eligibility ages.

Low levels of financial literacy were also cited as an issue. Although the majority of default investment options were balanced mutual funds, it said a recent survey had found half of respondents equated that to risk-free assets or did not know.

The report found that Australia's emphasis on defaults ensured default guidelines had a more far-reaching impact than in the US.

Although both countries had introduced a ban on conflicted remuneration and had restricted compensation structures, Australia was actively promoting the availability of advice along with standardised information on risks and fees, and had expanded ‘simple advice', the report said.

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