30/03/2016

The cost of living is going up, and the rate of dying is slowing down. Why the current minimum withdrawal rates for pensions may no longer support the Australian ageing population.

Meet Mickey!
Mickey retires when he turns 60 with a superannuation balance of $700,000, and uses his self managed superannuation to pay a pension at the minimum. His minimum annual payment is $28,000 per year until age 64 (effectively 5 years – 60, 61, 62, 63, 64) which means $140,000 in pension payments during this period (excluding allowances for investment income and not compounding the balance). From age 65 to 74 (10 years) the minimum payment is approximately $56,000 and this means that if Mickey lives to age 75 his super is potentially gone.

What if he lives to 85? The average life expectancy for a male in Australia is currently around 82-85 years old, and for women it is a few years older as well.

What’s next?
The Federal Government has been called upon to review the minimum withdrawal rate for pensions. Taking into account things such as the fluctuation of investment returns and the increasing age of the Australian population. Where an individual invests part of their pension payment for a year and the return is good, that will of course better their situation. On the other side of the coin, a bad investment year could create a dire situation for the individual.

Currently the rates are 4% per year for beneficiaries under 65; 5% per year for beneficiaries between 65 and 74; and 6% for beneficiaries between age 75 and 79.

There have been calls for the minimum withdrawal rate to be reduced to as low as 2.5%. By doing this Mickey could have a much greater number of years before his superannuation ran out. When a person’s superannuation runs out they look to the age pension for support. So the consideration becomes a balancing act between ensuring that there is not a mass of wealth sitting in a tax-friendly superannuation account for beneficiaries of the individual once they pass away and the individual exhausting all of their available superannuation before they pass away.

Building the nest egg – not in this lifetime!
Our politicians believe that superannuation is not supposed to be an estate planning tool but rather is supposed to provide for a person throughout their retirement. So if Mickey passes away at age 75 then the system has done its job. However, there is a large chance that with the current withdrawal rates and life expectancy, that will not be the case because Mickey could live until he is 90 instead.

So where do we sit?
A review doesn’t mean a definite change. It means a consideration of the facts with regard to all relevant factors. For superannuation to work for a person, for the whole of their retirement, it needs to be used wisely.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.