The thought of retirement can be unsettling for many people. Giving up the security of your business or employment income and living off your savings, investments and social security is usually a no-going-back decision. Even if you have built up a significant retirement nest egg, the fear of not having enough regular income to maintain your current lifestyle can be stressful.
For those who hold most of their savings in superannuation, a common assumption is that they should transition out of growth assets like shares and property into fixed interest and other yield investments to provide the retirement income they need. But this correct?
Yield assets in retirement
Superannuation pensions are determined by three variables:
- your account balance as at 1 July, or when you commence the pension;
- your age as at 1 July, or the starting date of the pension; and
- the relevant drawdown percentage for your age.
The current minimum drawdown requirements are set out below.
|Minimum Pension Drawdown Percentages|
|65 - 74||2.5|
|75 - 79||3|
|80 - 84||3.5|
|85 - 89||4.5|
|90 - 94||5.5|
|95 and over||7|
While everyone understands that the Commonwealth Age Pension is income, there is sometimes confusion between the investment income that a super fund derives – interest, dividends and distributions – and the pension income drawn by the member, which clients often refer to as “the amount my accountant says I have to withdraw.”
Investment income and pension income
There is no necessary connection between the investment income that a super fund earns on its assets and what a member receives as pension income. Indeed, it is not necessary for the fund to generate any investment income to pay a superannuation pension as long as there is enough cash available within the fund.
Example: Mary is aged 67 and has a self-managed super fund pension balance of $500,000 on 1 July. She therefore needs to draw a pension of $25,000 in the current financial year. Assuming she takes this from her SMSF bank account, it doesn’t matter whether that cash originally came from dividends, selling mining stocks or a tax refund.
The key variable in determining your pension income is the account balance. If you want your retirement savings to last, this is the number you need to focus on, not the amount of investment income that the fund derives. It might sound counter-intuitive but an investment that produces only capital growth may well be better pension asset than a fixed interest security that pays only income, particularly given that no capital gains tax is payable on the sale of assets supporting a superannuation pension.
Needless to say, the overall asset allocation mix will need to consider the risk tolerance of the members, likely cash requirements, portfolio diversification, fund expenses and other personal circumstances. But uncritically moving from growth assets to income assets when starting a pension is not necessarily the best strategy.