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Interest rate cuts will hurt retirees
The Reserve Bank of Australia has handed down an interest rate cut that will cause self-funded retirees a lot of financial pain, according to the President of the Association of Independent Retirees Mr Wayne Strandquist.
“Fixed interest investment forms a substantial part of a retiree’s superannuation and private savings, particularly in the latter years of retirement”, Mr Strandquist said. “The Reserve Bank cash rate reduction will put more downward pressure on term deposits rates with cash held in bank accounts paying almost zero interest.
“When retired, risk tolerance reduces over time to favour more conservative investments with less volatility and less risk like term deposits, bank savings accounts and other fixed interest investments. The reduction in fixed interest by the Reserve Bank continues a trend that has seen term deposit rates fall to historic lows, to a fraction of what they were when many retirees left the workforce.”
“After bank account fees are charged and zero-interest paid, retirees are effectively paying the banks to hold their savings”, said Mr Strandquist. “This negative return will further lower the living standards of retirees and require larger drawdowns from their retirement savings until they are forced to rely on the Age Pension”, Mr Strandquist explained.The Association is calling on the government to urgently reduce the current deeming rates to reflect the fall in bank deposit rates.
“The 2.25% government deeming rate is over three times the interest rate that can be actually earned today by retirees on a two-year term deposit with the major banks,” Mr Strandquist pointed out. “To earn returns that exceed the upper deeming rate, retirees are forced to consider riskier investments including a volatile share market. At the end of the day, retirees just want the secure, reliable, adequate income over a longer retirement that was proposed in the government’s Retirement Income Framework in 2016 and we are still waiting.”
Ground-breaking research on future advice
The Financial Services Council (FSC) has launched a research report by financial consultants Rice Warner offering some radical ideas for restructuring the model for financial advice that will start a policy debate on how to make advice more affordable and accessible.
Rice Warner proposes a future financial advice model which includes:
- All advice to be one of two categories – strategic advice or financial product advice
- New definitions of financial advice – general information and personal advice separated into simple personal advice, complex personal advice, and specialised advice
- New principles to refocus the system – simplification, affordability, accessibility, consistency, and quality of advice
- Less documentation – for example, allowing a Fact Find and a Record of Advice for the provision of Simple Personal Advice
- Realistic and less costly levels of compliance
- Tax deductibility for financial advice.
FSC CEO Sally Loane said quality financial advice is needed now more than ever as the economic impacts of the coronavirus pandemic are felt across the country.
“The Rice Warner Future of Advice report starts an important policy debate on how we can re-build a simpler and more affordable advice industry,” Ms Loane said. “The research examines both the need and value of advice and shows benefits of financial advice to the health and wellbeing of consumers, as well broader economic benefits such as reduced long-term expenditure on the Age Pension.”
The FSC will engage extensively with stakeholders, including Australia’s financial advisers, to consider the research ahead of launching a policy document or Green Paper on Financial Advice next year, a critical step in policy development.
“The aim is to build a new model for financial advice which not only makes professional quality advice more affordable and accessible for consumers, but also removes the mass of costly compliance and regulatory burden on the sector,” Ms Loane said.
“With advisers leaving the industry in record levels – Rice Warner reports 15% last year and an anticipated fall of a further 36% over the next five years – we need to act now to change the system.”
On 17th November ASIC also released a consultation paper titled ‘Promoting access to affordable advice for consumers’ which invites the advice industry to put forward “the issues and impediments relating to the supply of good quality affordable personal advice, and the practical steps that can be taken by ASIC and industry to improve consumer access to good quality affordable advice.”
ASIC Commissioner Danielle Press said, “Good-quality affordable personal advice may help consumers make better financial decisions, especially during times of heightened vulnerability. We welcome feedback from the financial advice industry and others with an interest in making advice more accessible to consumers.”
Missed or unpaid super
The Australian Tax Office (ATO) has reminded businesses that COVID-19 may continue to affect them and their clients, with some missing regular payments such as their employees’ super guarantee (SG).
If clients have missed the October 28 due date or underpaid the SG, they need to lodge a Superannuation Guarantee Charge Statement by November 28 to avoid penalties. If they cannot pay in full, a payment plan can be set up to suit their clients’ circumstances.
For more information, go to ato.gov.au.
More workers support ESG factors
New research reveals more superannuation fund members want their investments to have a positive impact on the planet.
A survey released this month by the Association of Superannuation Funds Australia (ASFA) found 64% of Australian workers want their superannuation fund to take action on environmental issues and gender diversity.
More than triple the number of respondents said they approve of superannuation funds taking action on more open corporate governance and climate change, with 61% of millennials saying they would be more likely to join a fund offering investments on climate change.
The online survey also showed an overwhelming majority of Australians believe the superannuation guarantee should increase from 9.5% to 12% as scheduled.
Based on the current Age Pension amounts of $67 a day for singles and $101 for couples, 75% said they would struggle to live comfortably on the pension alone.
The majority of respondents (52%) expect to live on a combination of superannuation, savings and the age pension.
2020 Shonky Awards results
In the annual hall of shame for businesses pushing faulty products, partnerships and prices, this year’s Choice Shonky Award goes to AMP for its “grossly underperforming superannuation division”.
Once a giant in the Australian financial services sector, AMP now has the lowest customer satisfaction ratings on record. In 2018, it had more than a million inactive accounts across its Retirement Trust and Super Savings Trust products.
Choice CEO Alan Kirkland says this year’s Shonky Awards had a string of surprises, including floor cleaners that “performed worse than water”.
Harvey Norman was also called out for its partnership with Australian financial services company Latitude Finance. Mr Kirkland said customers believing they were buying expensive products on interest-free terms later ended up trapped in debt with Latitude, paying very high interest rates.
“We know from financial counsellors that many people actually end up in deep financial trouble because of these deals,” Mr Kirkland said. “It’s an award because we don’t think people should be pushing expensive credit card products on the floor of retail stores.”
Rejecting the award, a spokesman for Latitude Finance said the company undertook rigorous credit checks on customers and that the vast majority of them paid off what they owed within the promotional period and therefore paid no interest whatsoever.
For the full list of the 2020 winners, visit www.choice.com.au/shonky-awards.