Flexible pensions proposal risks
Advisers may have to add another facet to their retirement planning conversations with clients if a Government proposal gets the green light.
Tuesday, August 27th 2013, 5:43AM 
3 Comments
As part of its confidence and supply agreement with the United Future party, the National Government has issued a discussion document looking at the option of flexible superannuation.
The proposal would mean that people could choose when they wanted to take their super. If they wanted the pension earlier than 65, they would get a reduced rate. Later, they would get a higher rate.
Finance Minister Bill English said the Government was testing the public appetite for more flexibility.
“The discussion document is deliberately set at a high level and more detailed policy work would be required should the proposal be progressed.”
Institute of Financial Advisers president Nigel Tate said the move would be risky. “If you defer the pension with a view to receiving a higher amount later on, and you kick the bucket early, you miss out. Or if the Government changes, there are issues around that.”
But he said advisers should discuss with clients the possibility that they might not get the pension at 65. “It’s an opportunity for advisers to guide clients and acknowledge eligibility issues and encourage people who are planning for their retirements not to assume they are going to get a pension until they are 67.”
He said that would amount to clients needing an extra $25,000 over two years, which they could call on if they still wanted to stop work at 65. “There’s plenty of time to plan for it but if people do what people usually do, which is put things off, they could fall into a trap.”
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Comments from our readers
(i) Will the payment adjustment be actuarially fair, (i.e.; those going early or late get the same on a PV basis by their assumed age of death). If so then there is no gain on average to anyone. However I can see some element of subsidy being built in by politicians for those going early, otherwise the weekly amount might be quite low. Even if actuarially fair those clients who have bad genetics or who drink/smoke and thus expect to die early should take it early. Similarly those who expect to live long (esp women) should delay.
(ii) If the discount rate is low, say the govt bond rate, then there is no gain to delaying - as the early payments can be invested at a higher rate and drawn upon when you actually retire.
(iii) How it fits in with tax, as delaying while you work could cut your marginal tax.
It would certainly make retirement discussions interesting for advisers.
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