Superannuation 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 demands trustees of super funds “formulate, review regularly and give effect to a retirement income strategy for beneficiaries who are retired or approaching retirement,” the Australian Institute of Superannuation Trustees said in a statement.
Paramount Financial Solutions planner Wayne Leggett said “it should help give people another option than simply ‘take the money and run’”.
Good advice could ensure a comfortable retirement
Often people who retire and seek no advice simply withdraw all their money from super and spend it on a trip, a caravan or pay off the mortgage.
But Mr Leggett said you could set yourself up for a comfortable retirement if you choose the right strategy.
“That would include getting decent earnings from your super and getting a part pension.”
As your super balance reduces over time, your age pension will take over in providing income.
But many people now don’t go to their funds for advice and blow their super early.
Under the new rules, however, funds will have to contact people in the run up to retirement and offer them advice, which could help them avoid some major mistakes.
A common mistake made by people who eschew advice is that they leave their superannuation in accumulation mode after they retire instead of moving it into pension mode.
That means they pay tax at 15 per cent on the earnings inside the fund.
“If you move into an account-based pension then it’s all tax free,” Mr Leggett said.
But moving into pension mode means you will fall under the drawdown rules, which legally require you to withdraw a minimum percentage of your super each year.
If you retire under 65, you have to take out 4 per cent of your super balance annually – and that figure grows to 14 per cent if you are lucky enough to live over 95.
As the above chart shows, the current drawdown rates are half those for the next financial year.
That is because drawdowns were halved for two years as a COVID emergency measure to prevent people having to take out lots of money when sharemarkets had fallen due to the pandemic.
David Knox, a partner with superannuation consultancy Mercer, said the legislation should help people avoid another common mistake around drawdowns.
“Many middle-income people just take the drawdowns that are required,” Mr Knox said.
“It can lead to a bizarre situation where people can have more income when they are 90 than when they are 70,” Dr Knox said.
“Many people die with considerable super left.”
That happens when people choose to withdraw too little in the early years of retirement and end up with more income made up of both super and pension than they need in old age.
Super funds offering advice to all members as they retire will help address this issue, too.
“We need to be clever about this and think these things through with each individual depending on their situation,” Dr Knox said.
“If you’ve got $400,000, we could say instead of taking 5 per cent why not take 7 per cent.”
Some members also use all of their super to pay off their mortgage when that may not be in their interests.
Why pay the mortgage?
“Even if you do have debt [on your home], the earnings that you could expect to get from your account-based pension would be significantly higher than the interest the bank is charging you on your home,” Mr Leggett said.
“That will likely remain so even when expected interest rate rises come into force.”
With growth in superannuation, annual income will increase “so the gap is widening in your favour,” Mr Leggett said.
The value of your home will also increase so that adds another benefit to the strategy.
In addition to requiring funds to offer advice before retirement, the legislation will push them to offer a range of products such as annuities or lifecycle superannuation options that many retail funds offer already.
Annuities are not popular because they reduce flexibility by demanding you hand over your free capital in return for a guaranteed income.
Annuities not only remove the option of withdrawing a lump sum once you are in them, they miss out on growth that rising markets will deliver to super funds.
“You are sacrificing a lot of flexibility for peace of mind,” Mr Leggett said.
Even moving into lifecycle funds, which automatically move to more conservative allocations as members age, has its risks.
“When you turn 70 most people have got another 20 years of life, so you don’t suddenly want to go into cash and fixed interest,” Dr Knox said.
Another change brought in with the legislation was the requirement that employers pay superannuation to people who earn less than $450 a month. Previously these workers received no super contributions.
The change will give super entitlements to 300,000 people, 200,000 of whom are women.
Those to benefit from the change currently have an average of only $12,000 in their super accounts.
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