Australia v UK Pensions Lessons

Australia v UK Pensions Lessons.

Australia looks set to radically change the whole retirement system and move savers 'en masse' towards annuities.

In the UK, we have had the Retail Distribution Review (RDR) and the Mortgage Market Review (MMR) where financial services companies, banks, investment companies, mortgage companies and insurers have faced huge changes to prevent another financial markets collapse and encourage greater security, transparency and confidence in financial services.

Similarly in Australia, their 'Financial System Inquiry' FSI has proposed major changes to pension savings in Australia.

Currently, Australia has a comprehensive Superannuation system, where people are required to pay in 9.5% of their salary into pensions. At retirement, Australians have access to their pension fund in the form of drawdown i.e. drawing money down from their pension fund just like a bank account. Sound familiar? This is exactly what the UK will have with effect from April 2015 Flexible Drawdown.

Why are we covering Australian Pensions and the FSI?

The Australian FSI has suggested that Superannuation moves away from lump sum withdrawals to annuities, citing the UK's 25% tax free lump sum and the balance of pension to provide an income. Many commentators in Australia are suggesting increased compulsory contributions to pensions of up to 12.5% of salary.

In addition, Australia is considering a similar move to UK in the financial services employee pay is too highly linked to volume of sales/commissions which in turn means poor consumer outcomes.

What does all this mean? Our view

The UK is moving towards the Australian model of drawdown and also compulsory contributions of up to 8% pa in workplace pensions. Australia is moving towards the UK model of smaller lump sum and annuities. Both have failed and are having to develop to allow for increased life expectancy and people needing more income in retirement.

The message though is clear, full access to drawdown of pension funds in Australia is failing as people are running out of money as they age, in the UK there are already concerns that people will run out of money. In the UK, annuity rates are poor as most are linked to central, long term interest rates. Will the same problem plague Australia?

Neither countries have solved the problem, ageing population is a global problem and the only solution will be to educate people to save and save at much higher volumes than we do today.