Govt intervention required in super system: Grattan

Australians need government help to spend their superannuation in retirement, to stop the savings system ending up as "a massive inheritance scheme", the Grattan Institute warns.

Australians need government help to spend their superannuation in retirement, to stop the savings system ending up as "a massive inheritance scheme", a new report has warned.

A report into superannuation by the Grattan Institute finds that few retirees draw down on their super as intended.

It highlights that many retirees are net savers, with their super balances growing for decades after they retire, for fear of outliving their savings.

"This is not how it was meant to be. Too few retirees are enjoying the benefits of the savings they built up during their working lives," report author Brendan Coates says.

"You're asking people to draw down their savings when they don't know how long they're going to live.

"You don't know if you should be drawing 4.5 or 6 per cent a year because you've got a 20 per cent chance of dying before the age of 80, and a 20 per cent chance of living to 94."

The report argues that after being guided through the superannuation system during their working lives, retirees are then left in the dark with little help in how to manage their super balances, with about 80 per cent of Australians finding retirement planning complicated.

"The little guidance retirees currently receive is unhelpful — it steers them only into account-based pensions, which require them to manage their spending to avoid the risk of outliving their savings," Dr Coates, the housing and economic security program director at Grattan, says.

"Half of those using an account-based pension draw their super at legislated minimum rates."

Grattan's modelling shows that Australians who draw down their super at the minimum rate when they retire will leave the equivalent of 65 per cent of their original super balance unspent by the age of 92.

The think tank is calling on the federal government to offer all Australians the option of a lifetime annuity.

An annuity is essentially a contract taken out for a fixed sum, which then pays you a regular, agreed income (usually monthly) for life and the payments are tax free, if super money is invested.

According to ASIC's Moneysmart, the difference between account-based pensions and annuities is that the latter are less flexible, but provide a guarantee about future income, whereas account-based pensions can be affected by market returns.

Grattan is advocating for retirees to be strongly encouraged to put 80 per cent of their super balance above $250,000 into a government annuity as a default option, saying such a reform could boost retirees' incomes by up to 25 per cent.

As for those with balances below that level, the age pension would offer a minimum lifetime income.

Despite there being a large private financial advice industry, the institute argues such prescriptive government measures are necessary.

"Relying on super funds to deliver annuities at scale is unlikely to work," the report states.

"Super funds have resisted previous attempts by government to get them to do so.

Dr Coates believes few Australians buy annuities because they find it hard to trust that a private provider will offer them a good deal on a product they find it difficult to understand, whereas a government scheme would be likely to increase uptake.

He argues that administering such a scheme would cost taxpayers nothing.

"People would be using their super balances to buy the annuity, and the government would be managing those funds, and paying out the annuities from the pool of funds that comes from those annuity purchases.

"In fact, the government annuity provider would actually pay a levy to the government each year for the benefit of using the government's balance sheet because they wouldn't have to hold the standard regulatory capital."

The think tank doesn't believe a government-backed annuity pension scheme has been flagged in the public discourse in recent history.