Many Australians, particularly those on lower incomes, are often characterised as lacking knowledge or interest in superannuation.

Research by the Association of Superannuation Funds of Australia (ASFA) confirms this.

It found only 51% have sought any sort of financial advice before retiring.

Financial advice plays a critical role in helping people maximise their super. But most of us don’t seek professional guidance.

To make matters worse, superannuation experts say those with small amounts of super are the least likely to seek it.

Financial literacy

The failure of households to approach super like experienced asset managers is often attributed to poor financial literacy.

Better knowledge, it is often reasoned, would help lower income households make financially savvy decisions. This would help give them a better chance of achieving a comfortable retirement.

Getting professional advice about managing retirement savings is a first step towards knowing what you don’t know. Learning to trust independent advice can optimise risk and returns, even if those decisions conflict with our instincts.

ASFA research found while trust in super funds was relatively high, only 12% sought information or advice from the funds.

Career interruptions

Some households might have little superannuation because their hourly wages are low and they have long breaks from the workforce. This might be due to raising children, personal illness or caring for others.

Instead of being able to rely on public healthcare or pay others to provide this support, they are required to reduce or abandon paid work to do it themselves. This group consists overwhelmingly of women

They are also unlikely to have benefited from high employer contribution rates, such as those of federal public servants or university employees, who have long earned a standard 17%.

Tax and other benefits

Low balance households are also unlikely to have paid large sums into super to avoid income tax. One in every four dollars contributed to super is deposited as voluntary contributions, which attract a low tax rate.

But most of these low tax contributions are made by the 20% with the highest incomes.

In fact, with 70% of superannuation assets owned by the wealthiest 20% of households, low balance households have relatively little to gain.

Research shows those with the lowest balances believe superannuation is a largely a tool for high income earners to avoid tax.

And while financial advice will always be more useful to those who are able to use super as a tax minimisation strategy, even for low-balance households – getting financial advice is worthwhile.

Financial advice can help households choose investments that optimise the risk/return profile of superannuation at each stage of the life cycle.

It can help avoid unnecessary fees and taxes and help people make the best decisions about spending in retirement so they can get the most out of their super.

Potential sticking points

The 2017 royal commission into banking and finance misconduct revealed major conflicts of interest in the advice sector. This only made some people more wary about trusting a stranger with their life savings.

At between $4,000 and $12,000 for a personal financial plan, independent financial advice is not cheap. There is free counselling to manage debts but there is no free, independent advice for longer-term financial planning.

Recent regulatory efforts to better position superannuation funds to provide free financial advice to households will improve access for many.

But these efforts won’t resolve the conflict of interest issue, given there is little incentive for funds to suggest investment strategies using other providers. This is particularly important during the draw down phase.

This is where people start using their super which they receive as either a lump sum or income stream. The products offered by any single super fund to set this up are limited.

Superannuation balances can be seriously eroded by unnecessary fees, inappropriate investments and poorly planned draw down strategies. This is particularly damaging when low balances are involved.

Facing poverty in retirement

As a result, failure to seek financial advice can increase the risk of elderly poverty, especially if people retire without having bought or paid off a home.

Any savings that can be preserved can make a meaningful difference to the capacity of such households to have a dignified retirement.

For these reasons, access to free and independent advice is critically important for the superannuation system to better serve low-balance households. But free, independent advice is still not available in the superannuation system.

It is not surprising low-balance households are reticent to engage in super given the lack of accessible advice. But the peripheral role of low-balance households in a system dominated by Australia’s wealthiest households may play a role in that reticence as well.

Antonia Settle, Lecturer, Monash University

Image credits: Shutterstock 

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