Advice and real financial independence

Renato Mota, Group General Manager - Wealth Management

Renato Mota

The importance of quality financial advice to help Australians build a retirement income stream outside of the age pension has never been more apparent. According to the OECD report, Pensions at a Glance 2015, Australia ranks second lowest of 33 OECD countries studied for ‘social equity’, with more than one-third of pensioners living below the poverty line.

It’s not surprising then that the Government continues to push for retirees to take more responsibility for their own retirement savings. “Becoming a self-funded retiree, I think, is one of the most important objectives of any Australian,” Treasurer Scott Morrison has said.

To ‘encourage’ self-funded retirements, the Government continues to shift the goalposts for those receiving – or expecting to receive – the age pension. In 2015, it was deeming rules changes. In just a few weeks, on 1 January 2017, changes to the assets and income test come into effect. While over the next few years, the retirement age will steadily rise to 67 years.

Super – one piece of the plan

Living longer than ever before, Australians also face the extra financial hurdle of needing more savings to cover their full retirement. The superannuation industry has a prominent role in meeting this challenge. It’s useful to remember that, as the Super Guarantee only began in 1992, it will be another 20 years before retirees have had the benefit of super contributions for their full working life.

Meanwhile, as our nascent superannuation industry matures into a genuine second pillar of retirement, the Government’s continual tinkering with legislation is undermining long-term confidence in super. And it’s having a very real effect. Data released by the Australian Prudential Regulation Authority in November showed contributions through the year to September 2016 fell 1.5 per cent, or $1.5 billion, in part due to voluntary, after-tax contributions tumbling nearly 17 per cent to just under $20 billion.

The importance of holistic financial advice

All of this reinforces the importance of comprehensive financial advice, both inside and outside of super, to better meet the goals of every stage of your clients’ retirements.

Some of this advice may be complex, such as tax or investment strategies. Other advice may focus on financial products, including the emergence of comprehensive income products for retirement which are designed to meet retirees’ financial needs later in retirement.

However these are just a part of how advisers can contribute to the financial well-being of clients. Most valuable for clients will be a holistic approach which empowers clients with the skills to manage their lifetime earning capacity – 40 years for most of us – to last another 20 years after retirement. This includes budgeting and prioritising expenditure, managing debt, insurance, and more broadly, measuring their progress towards their financial goals.

Starting early with financial advice

Against a backdrop of record-low interest rates and wages growth, one challenge for advisers will be attracting younger clients to seek advice. Starting early is a significant step to reaching clients’ financial and lifestyle goals in retirement. That’s why developing good financial habits and being financially literate in our twenties should be a focus for the Government. Achieving this will have significant social and financial benefits in the years to come.

Finally, as we reflect on the significance of the OECD’s Pension at a Glance report (and anticipate the release of the 2016 version), it’s important to recognise the good our industry does in helping people have the lifestyle in retirement they deserve.

As 2016 draws to a close I would like to wish you a safe and happy holiday season and we look forward to supporting your business in 2017.

The information contained in this newsletter is provided on behalf of the IOOF group of companies and is intended for financial adviser use only. It is given in good faith and has been prepared based on information that is believed to be accurate and reliable at the time of publication. Any examples are for illustration purposes only and are based on the continuance of present laws and our interpretation of them at the time.