Financial advice is crucial for retirement planning but often expensive and inaccessible, with the result that many Australians fall into the "missing middle" who require more than basic advice but cannot afford comprehensive financial planning, according to Ian Fryer, general manager at Chant West.
"The primary purpose of super is to provide income during retirement. Super funds need to do more to assist members in transitioning from the accumulation phase to the decumulation phase, where they draw down their savings," he said.
Mr Fryer said an ‘advice gap’ exists whereby many Australians require more than basic advice but cannot afford comprehensive financial planning. He highlighted the importance of the Retirement Income Covenant in driving innovation and improved retirement outcomes.
“People need to understand how much they can draw down in retirement and how they should be invested. Given that the optimal outcome will depend on each member’s situation, they need tailored financial advice.
“Indeed, the best way to deal with retirement planning is through financial advice. To get tailored advice, it might cost about $5,000. But many super fund members would not want to or be unable to pay this much. This highlights the cost barrier preventing many members from accessing advice,” he said.
“There is some intra-fund advice offered by super funds, which is helpful in answering single-issue questions during the accumulation phase, but someone moving into retirement needs more than this.”
According to Mr Fryer, this has led to the “missing middle” – where the majority of retirees sit. He says questions faced by most Australians on how they should invest their super, how much they can draw down and how long their savings will last are not complex questions, but they require more than basic advice. Some funds have moved to address the advice needs for the “missing middle”.
"With Australian Retirement Trust and Aware Super, for example, members can get advice to help them understand how much they can draw down and how long their money is going to last, and those super funds offer that for free.
"Telstra Super goes one step further and says 'look, we can help you answer that question, and we can take into account a couple of other things like how much you’re likely to get as a household including the age pension’, based on a member’s financial details and that of their spouse. And they charge a fee of as low as $800 for a couple. Russell offers a similar service where a reasonably simple retirement plan, including age pension requirements and a spouse’s needs, can be provided for a slightly lower fee. But many super funds don’t offer this," he said.
The Retirement Income Covenant is encouraging funds to offer better retirement solutions, including guidance, tools and affordable advice to address members’ needs to maximise income in retirement, manage financial risks and ensure investment flexibility.
My Fryer believes harnessing the power of technology and data through digital advice will help to meet this objective and is critical to make advice easier for super fund members to access.
“Digital advice is one way that we can help members answer the critical retirement planning questions. An individual could enter some personal financial information into an online advice tool which produces a recommendation based on those inputs," he said.
"Ultimately, we want to get a stage where if you're in a certain cohort and you get to retirement, a fund might say ‘based on what we know about you, here's what we suggest and if you want to implement this change, just click this button’. Or if you want to talk with someone about it, call this number to speak with one of our advisers.”
Super funds are also trying to overcome these challenges by developing lifetime retirement products which give members income security for their rest of their lives.
“Several providers now offer these types of products - Australian Retirement Trust, AMP, Allianz, Generation Life and Challenger. These products aim to give members income for the rest of their lives, even if they live a long time, which provide peace of mind. But very few super funds offer such a solution.”
Mr Fryer also believes funds need to help members better manage drawdown rates.
“Most members in most funds tend to take out the minimum drawdown, and for people aged under 65 that’s 4%, and for 65- to 75-year-olds that’s 5%. If you do so, at age 75
you're likely to have a whole lot more in your super than when you retired. Is that really the point of super? This does not necessarily align with the purpose of super, which is to provide an income during retirement.
"Some funds are helping members understand that they can likely draw down more. In those years from age 60 to 75, funds like AustralianSuper and NGS Super are helping members understand they can draw down an extra 2%, for example. This might not sound like much, but it's an extra 40% to 50% in income which can radically change how people live in retirement."
