Unlike most years there are no major changes to superannuation rules coming into effect from July this year. However one temporary Covid measure is being dropped meaning the rules will return to normal.
The minimum payments that must be made from retirement pension plans are to revert to their usual levels. During the Covid period the minimum payments that account-based pensions must make were halved so retirees didn’t have to draw out larger amounts when investment values were sharply down.
From July the minimum payments will once again range from 4 per cent for under 65’s to 14 per cent for those over age 95.
When Covid hit many retirees were happy to cut their income to half rates due to fear about the future. They couldn’t travel or engage in leisure activities and were happy to economise while the future was unknown.
However some are now short of income. The cost of living has increased sharply over the last eighteen months. Some retirees have run short of cash and had to raise their income payments.
What is the right amount retirees should spend? It’s an individual matter. If they wish to leave legacies for their family, they should take the minimum payments. If that is not important, they can spend at higher rates.
Funds invested in a balanced growth style should earn 7 to 8 per cent per annum long term average. The earning rate can be compared to the drawing rate. Retirees under age 85 are required to draw at rates of no more than 7 per cent.
If leaving a legacy is not important to them drawing at a higher rate early on, and compulsorily from age 85, is fine. If leaving a legacy is important, they can consider increasing their exposure to growth assets to boost returns.
When compulsory payments rise to 9, 11 and 14 per cent at older ages, retirees can reinvest some of that income. A regular contribution of part of the pension can be made each month into a managed fund savings plan.
It’s natural to want to keep reserves – for aged care fees, adverse government rule changes or unexpected events. Some analysts say retirees should enjoy their retirement more by spending more. However there is a fear of running out of money. No-one wants to be old and broke.
While the designers of the superannuation system encourage retirees to spend their capital, some view that lump sum capital is a valuable and scarce resource, and very difficult to accumulate.
They want the capital to be available to support their family in the future. Capital can make a major difference to people to buy a home, build a business or generate income for someone with limited earning potential.