Shrinking income streams

Forget the figures I gave you last year regarding annual amounts needed to fund a comfortable lifestyle and a modest lifestyle in retirement. You will now need more in your super account to fund higher levels of salary replacement thanks to the changes made by the government in the form of the Social Services Legislation Amendment (Fair and Sustainable Pensions) Act 2015.

In essence eligibility for the Age Pension is determined by your age and the Assets and Income Tests. The new legislation, which comes into effect on 1 January 2017, reduces the pension payments payable to many individuals based on a much stricter assets test.

In providing figures needed to fund a comfortable retirement, financial advisers assume a certain amount of the Age Pension would be available, especially after a long drawdown period from the superannuation account. Financial planners have had to revise their estimates of the amount needed for a comfortable retirement due to the reduced availability of the government pension for many individuals.

So how can you accumulate more prior to retiring now that the big freeze is on the increased employer contributions and the Age Pension will be harder to access? Salary sacrifice is a no brainer if you can afford it and you earn more than $18,200 per annum. You pay 15% tax on salary sacrifice contributions up to the cap which is $30,000 for workers under 50 and $35,000 for anyone over 50.

The caps include employer contributions currently set at 9.5% of salary. Over time salary sacrifice boosts account balances thanks to the magic of compounding investment earnings and consistent saving.

Your investment choice is important because a large portion of your final super balance will be the result of investment earnings. Your risk tolerance usually determines your preferred areas of investment and some super funds actually reduce risk once members reach certain milestone ages such as 50 and 60. In terms of the performance of broad asset classes over time cash is low risk, low returns; bonds are slightly higher risk, higher returns; property is higher risk, higher returns and shares are high risk, high returns. A general rule of thumb is that the younger you are, the more risk you can take. A 30 year old, for example, has a 30 year wait to access super so short-term market movements are not directly relevant. Long-term investment choice is extremely important in determining the final account balance at retirement. A portfolio heavily weighted to cash is actually considered risky as it is unlikely to outperform inflation over long periods of time and very unlikely to outperform growth assets such as shares and property.

A Transition to Retirement Pension is a way of adding extra dollars to your super account due to its tax efficiency. Currently a 55 year old (moving to 60 for people born after 1964) can open a Transition to Retirement Pension and the bulk of the super account is moved into the pension phase where there is no tax on the investment earnings. The member must keep at least $2000 in the super account to receive employer payments while she/he is still working. The Pension can be paid fortnightly, monthly, quarterly or annually. Since the member is still working and may not need the pension payment, she/he can elect to recontribute it into the super account on either a before-tax or after-tax basis, subject to the respective annual contribution limit. There is an added advantage when the pension payment is recontributed into super as an after-tax contribution. This is that in the case of the member’s death, the after tax contributions are paid to adult children or the estate completely tax free. It is worth remembering also that if the member is over 60, the pension payments are completely tax free. This is a definite tax savings and an encouragement for members to participate in a Transition to Retirement Pension.

The other obvious way to accumulate more super for retirement is working longer. It has the twofold advantage of delaying the draw down period as well as maintaining contributions.

The changes to the pension rules are game changers as the government tightens accessibility via the income test. As a result super fund members will have to become more ‘self-funding’ which means more money in the draw-down bucket prior to retirement.

(Important information: The information in this article is general information only and does not take into account your objectives, financial situation or needs. Before making a financial decision, please assess the appropriateness of the information to your individual circumstances, read the Product Disclosure Statement for any product you may be thinking of acquiring and consider seeking professional advice.)