Market insight debunks the lump sum myth

Project Description

Rice Warner’s Market Insights team collaborated with its client, a leading wealth management division of a big four Australian bank, to create an annual research project that not only leverages our unique market data, but helped to expose some common myths about the nature of retirement in Australia.

A common misconception casts Australian retirees as having a strong preference for lump sum payouts over a future income stream.  The belief being that retirees spend their superannuation savings on material goods and overseas trips, and then apply to receive a full Age Pension.  This is commonly known as ‘double dipping’. But is this actually the case?

Our Response

Rice Warner brought its scientific approach to understanding the perceived problem.  We knew the source of the myth began with raw APRA statistics that show 50 per cent of super benefits are taken as a lump sum.  This statistic has led to incorrect public interpretation, given that:

  • the figure includes all lump sums (including those paid on death and disability)
  • pensions reflect payments from existing account based pensions which are only seven per cent of the value of the balance each year.

Our response was to look deeper, measured against our unique access to detailed exit data from a number of funds representing over nine million members.  The results categorically showed that the majority of retirement benefits are taken as income streams at retirement.  It is true that there is a large group of members with small accounts (less than $100,000) who take lump sums at retirement.  However, this is rational behaviour, particularly if the benefit is used to repay debt or pay for a renovation or new car.  In practice, a significant part of these benefits is invested securely into term deposits, which is a different form of saving.

Outcome

Our client launched the results of the research to media, receiving widespread coverage. The research will be an annual ‘thought leading’ fixture in the Australian financial services market.

In the initial report covering the year to June 2014, the underlying facts about retiree savings habits included:

  • 3% of retirement assets were taken as income streams.
  • 28% of accounts with balances of $50,000 or less are taken as pension rollovers.  However, for balances between $50,000 and $100,000, the split between accounts taken as lump sums and those taken as pensions is roughly even.  For balances of more than $300,000, almost 87% of accounts are taken as pensions.
  • As the superannuation system matures, 96% of all retirement payments will be taken as income streams by 2025.