New laws designed to make comfortable retirement a little easier
Pension funds will be required to offer financial advice and new products to members approaching retirement under new laws passed by parliament last week.
The legislation included a retirement income covenant that requires super fund trustees to “formulate, regularly review, and give effect to a retirement income strategy for retired or near-retirement beneficiaries,” it said. the Australian Institute of Superannuation Trustees in a statement.
Paramount Financial Solutions planner Wayne Leggett said “this should help give people another option than just ‘take the money and run'”.
Good advice could ensure a comfortable retirement
Often people who retire and don’t ask for any advice just take all their money out of the supermarket and spend it on a trip, a caravan or to pay off the mortgage.
But Mr Leggett said you can set yourself up for a comfortable retirement if you choose the right strategy.
“That would include getting a decent income from your super and getting a partial pension.”
As your super balance decreases over time, your old age pension will take over to provide you with income.
But many people no longer go to their funds for advice and blow their super early.
Under the new rules, however, funds will have to contact people approaching retirement and offer advice, which could help them avoid some major mistakes.
A common mistake made by advice avoiders is to leave their superannuation in accumulation mode after retirement instead of switching it to pension mode.
This means that they pay 15% tax on income inside the fund.
“If you switch to an account-based pension, everything is tax-free,” Mr Leggett said.
But going into pension mode means you’ll fall under the drawdown rules, which legally require you to withdraw a minimum percentage of your super each year.
If you retire before age 65, you must withdraw 4% of your super balance each year – and that figure rises to 14% if you are lucky enough to live past 95.
As shown in the graph above, current drawdown rates are half of those for the next fiscal year.
Indeed, levies were halved for two years as an emergency COVID measure to prevent people from having to withdraw a lot of money when stock markets fell due to the pandemic.
David Knox, a partner at retirement consultancy Mercer, said the legislation should help people avoid another common mistake about direct debits.
“Many middle-income people only take the necessary swabs,” Knox said.
“It can lead to a weird situation where people can have more income at 90 than at 70,” Dr Knox said.
“A lot of people die with considerable super left.”
This happens when people choose to withdraw too little in the early years of retirement and end up with more compound income from both super and pension than they would need in old age.
Super funds offering advice to all retired members will also help solve this problem.
“We have to be smart about it and think about these things with each individual based on their situation,” Dr. Knox said.
“If you have $400,000, we could say instead of taking 5% why not take 7%.”
Some members also use all of their super to pay off their mortgage when it may not be in their best interest.
Why pay the mortgage?
“Even if you have debts [on your home]the income you could expect to earn from your account pension would be significantly greater than the interest the bank charges you on your home,” Mr Leggett said.
“That will likely remain the case even when the planned interest rate hikes take effect.”
As pensions grow, annual income will increase “so the gap is widening in your favour”, Mr Leggett said.
The value of your home will also increase, which adds another advantage to the strategy.
As well as requiring funds to offer pre-retirement advice, the legislation will push them to offer a range of products such as annuities or lifetime retirement options that many retail funds already offer.
Annuities are not popular because they reduce flexibility by requiring you to hand over your free capital in exchange for guaranteed income.
Annuities not only remove the ability to withdraw a lump sum once you’re there, but they miss the growth that rising markets will bring to super funds.
“You sacrifice a lot of flexibility for peace of mind,” Leggett said.
Even the move to lifecycle funds, which automatically shift to more conservative allocations as members age, carries risks.
“When you hit 70, most people still have 20 years left to live, so you don’t suddenly want to jump into cash and fixed interest,” Dr. Knox said.
Another change made by the legislation was the requirement for employers to pay a retirement pension to people who earn less than $450 a month. Previously, these workers did not receive super contributions.
The change will give super rights to 300,000 people, including 200,000 women.
Those benefiting from the change currently only have an average of $12,000 in their super accounts.
The new daily is owned by Industry Super Holdings