The best way to fund retirement continues to be a topic of debate. There is great appeal in the age pension. It is guaranteed by the Government and underwritten by its ability to collect taxes. Any politician who wants to reduce the pension does so at the risk of their career.

The age pension gives those with limited savings a secure retirement income at a moderate level. One of the first questions most people have when starting to plan their retirement is “Will I qualify for an age pension?” It is very popular. 

Major financial institutions offer similarly assured retirement incomes guaranteed for life. They are called annuities. They can be indexed to inflation to provide certainty. They are backed by the huge reserves held by international financial groups.

Yet annuities are not popular. Only a small proportion of retirees invest in them. Of course, the retiree must hand over part of their savings to buy an annuity, whereas the age pension costs nothing, if you qualify.

One might think retirees would be happy to hand over a lump sum in exchange for a guaranteed income for life. Surely financial security forever appeals. Yet most choose not to do so. Giving up control of their capital seems to be the sticking point.

Most Australian retirees have accumulated substantial retirement savings through the compulsory superannuation system. Once they have those savings, they are very reluctant to give up control of them.

Most choose to use account-based pensions for retirement income. These provide lower incomes than an annuity would. Retirees choose to live on less so their children and beneficiaries will have more after they are gone. An annuity would leave nothing, unless death came early.

Federal policy bureaucrats have long puzzled over why more retirees don’t buy annuities. They have even offered a forty percent discount for annuities in the age pension means tests. Still the numbers buying them remain low.

Account-based pensions provide an income from a personally owned pool of investments. It is necessary to choose investments that manage risks such as market fluctuations and erosion by inflation, to ensure the income won’t run out. 

This can be done with professional advice and utilising skilled fund managers. It is essential to choose assets that will appreciate with inflation. In most cases this works out well. If large market reductions do occur the retiree can always fall back on the age pension. 

The compulsory super system was designed to provide assured retirement income, not build long term family wealth, but it is doing both well.