Mandatory superannuation drawdowns for retirees should be cut during the coronavirus crisis to protect savings, according to lobby group National Seniors.
“During the global financial crisis, the Rudd government halved the drawdown rate for retirees’ superannuation and we think that should be introduced now,” said Ian Henschke, chief advocate with National Seniors.
Drawdown rules set a minimum amount retirees must withdraw from their super accounts each year.
They begin at 4 per cent for retirees under 65 and rise to 14 per cent for those over 95.
“Current drawdown rates were set at the beginning of the financial year and don’t take into account the falls in asset values since the crisis started,” Mr Henschke said.
As a result, a retiree over 65 would have to withdraw 5 per cent of the value of a fund at the start of the year despite an average fall in balanced funds of around 10 per cent to date.A 65-year-old retiree with a super balance of $150,000 would have to withdraw $7500 from a fund that would currently be valued at $135,000.
That means they would be withdrawing 5.5 per cent of the current value of their account, meaning their savings are eroding faster than they would have planned for.
Retirees spending more than they want
“Members are telling us that they are being forced to withdraw from super at a faster rate than they want to,” Mr Henschke said.
“A poll conducted last September [by Tax and Super Australia] said 50 per cent of retirees thought mandatory drawdown rates were too high and that was before the crisis.
“If drawdown rates are cut, then self-funded retirees will be able to remain self-funded for longer meaning there will be less call on the age pension.”
One retiree who did not want to be named told The New Daily that “I had $106,000 in my fund before the falls and now it is worth $88,000, which is less than I had in there three years ago”.
“In response to the 2008 downturn in global financial markets the government provided drawdown pension relief by halving the minimum rates in 2008-09, 2009-10 and 2010-11,” said Nick Coates, head of research and campaigns at Industry Super Australia.
“The minimum rates were reduced by 25 per cent in 2011-12 and 2012-13.
“ISA would encourage the government to investigate if this relief could once again be provided to retirees.
“This would assist those who wish to preserve their super after the current downturn.”
What to do with your super
Falling markets have left many people worried and wondering what they should do with their superannuation accounts.
Financial experts say the answer to that question depends on who you are, but getting professional advice is the way to go.
“It depends on your age and financial position,” said Paul Garner, a certified financial planner with Novo Wealth.
“If you have 20 or so years of working life in front of you, then you are going to look back at this period and say ‘what a wonderful buying opportunity that was’.
“If you keep investing in the market then it will be a wonderful example of dollar cost averaging, which will help you boost your wealth in the longer term.”
Dollar cost averaging is the practice of continually putting money into markets whether they rise or fall.
Investing progressively in a falling market pushes down the overall cost of your assets and boosts asset values when markets eventually rise.
“Younger people who are in the default super option could change their contribution allocation to a more aggressive stance,” Mr Garner said.
“If they have the risk appetite they could even move their whole account to a more aggressive stance.”
However, consideration needs to be given to a person’s overall financial situation before that move is made.
Cashing up for the crisis
Integral Private Wealth principal David Simon stressed the need to check risk profiles with an adviser or by using the government’s MoneySmart website.
“If you are five years out from retirement it might be a good time to kick-start your portfolio by contributing more,” Mr Simon said.
“However, if you are concerned about your job and want to build up a cash balance, it might be a good idea to stop making extra payments to super through salary sacrifice and put the money aside.”
Whatever you do with your super, Mr Garner warned that now isn’t the best time to take out a large lump sum.
“If you haven’t done that now, it’s too late,” he said.
“You would be taking money out of the market after it has fallen and locking in losses.”
The New Daily is owned by Industry Super Australia