Even though the government is still to finalise the precise details of the budget super changes, retirees have sufficient information to plan ahead to cushion the impact of the major changes to apply from July 1, 2017.
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Clearly, it will be much harder to deposit more money in super when the new rules apply. Those able to do so should therefore think twice before withdrawing money already in their fund.
In the future, the incentive, except for people with smaller account balances, will be to withdraw only the minimum pension required under the legislation. When the maximum amount that can be invested in a pension account is limited to $1.6 million, retirees will have to pay tax on the earnings on balances in excess of that amount.
However, compared with the current situation, this change has one advantage at older ages, especially when investment returns are low.
The minimum annual pension withdrawal rate increases gradually from 4 per cent before age 65 to 5 per cent from 65 to 74, 6 per cent from 75 to 79, 7 per cent from 80 to 84 and 9 per cent from 85 to 89. At age 90, the minimum withdrawal rate is 11 per cent.
These rates were set when investment returns and inflation were higher and life expectancy was much lower than it is today. The risk for many retirees now is that lower investment returns and these high minimum withdrawal rates will result in their superannuation running out before they die.
Retirees with account balances of less than $1.6 million will be forced to withdraw these specified larger amounts as they age. They could, if they choose, move part of their money into an accumulation account and reduce the amount they have to withdraw.
The price for doing so is lower investment returns because of the tax on accumulation account income. Most retirees, moreover, rely on their pension income to live.
However, when the total account balance now in pension phase is larger, there's much greater flexibility especially at older ages. For example, the minimum annual pension for a retiree aged 75 with $2.5 million in pension phase is currently $150,000. If, as will be required from July 1, 2017, $900,000 is moved into an accumulation account, the minimum annual pension required is only $96,000. If additional income is needed, it can be obtained by a tax-free withdrawal from the pension account.
Even though the budget changes were designed to increase tax revenue, they increase the flexibility for those with larger super balances to make them last longer. Similar assistance could be provided for older people with smaller account balances, for example by reducing the minimum annual withdrawal requirements.
Daryl Dixon is the executive chairman of Dixon Advisory. comments@dixon.com.au
