My portfolio looks like heresy when measured against the orthodox modern diversified portfolio designed to manage (volatility) risk, but I believe (and the actuaries agree with me) that my large asset allocation to Australian shares is actually a smart approach to ensuring the money does not run out over a 30-year retirement.

Financial planners and their employers (managed funds), are focused on volatility risk, that is bumpy returns. That is what traders do, but with increased life expectancy, retirees need to be very concerned about longevity risk, that is, the risk that they will run out of money.

Actuaries understand life expectancy and longevity risk. They argue that dividends from Australian shares offer the best protection against longevity risk, precisely because dividends grow faster than inflation.

My point is that with sufficient income, I can sit out any downturn in my SMSF, so falling share prices have no effect on my investment strategy, and anyway, my income depends on company profits and dividends, not prices. As long as I am not selling any assets, volatility is not a risk I need to manage. If I’m in a retail super fund however, I am selling assets (units) every time I take a pension payment, so price volatility is now a big problem, that can only be addressed by adopting a less aggressive and more balanced portfolio (fewer shares) and therefore producing a lower long-term return and which will therefore increase my longevity risk.

Secondly, the amount of capital I need to generate sufficient income is smaller for shares than other asset classes because the yield is so high inside my SMSF. If I can get 7% after-tax yield from my shares inside my SMSF, I only need half the capital to produce the same income than if it is producing only 3.5% after tax and costs (e.g. for a property investment).

So I get to eat my cake and have it too. I get high yield and that income stream is growing faster than inflation.

The problem for retirees is adequate income now and adequate income after 30 years of inflation. You only get at the guts of the retirement problem by getting retirees to focus on the correct risk. With enough income, it is not volatility risk. So the aim of financial planning should be to get people to the point where their capital generates enough income now and it grows over time. Then it does not matter how long they live!

Why $1 million can last forever

If I have $1 million in my SMSF invested in Australian shares with full dividend imputation, I receive about 5% in dividends and another 2% cash refund from the Tax Office as the imputation credits are fully refunded in pension phase. My SMSF thus generates $70,000 per year. (If I have Telstra in my portfolio I can generate 12% income.)

Dividends are linked to profits by a fairly constant pay-out ratio so that dividends increase as company earnings increase. If history is any guide, my dividends grow by an annualised rate of 7 or 8% per year, which is greater than inflation. In other words, if I can manage to live on $70,000 this year, I am better off next year without the need to reinvest any income. I also do not need to sell any shares.

As my income is growing faster than inflation and my capital remains intact, my $1 million must be able to sustain me for as long as I live, and then I can pass the portfolio on to my heirs.

With this strategy, my SMSF portfolio generates about 15% total return, comprised of 7% income and about 8% average growth. I will leave it to you to explain to your readers why your retail super fund can only generate 8% income and growth before inflation.

There is no doubt that the market value of my portfolio will be volatile but my income depends on dividends, not prices. Dividends are far less volatile than share prices. Unlike a retail super fund where each pension payment is the sale of assets (units) at current prices, my income depends on earnings, not sales. Volatility is not a risk I need to manage and therefore I can afford to hold a less conservative portfolio than would be required if I was in a retail super fund that depends on the sale price of assets for each pension payment.

Clearly, if I am not paying exorbitant fess to fund managers, and I am not required to hold a conservative portfolio to safeguard me against the volatility introduced by the active trading of my fund manager who was recommended by my adviser, my $1 million is sufficient to sustain me for ever, or at least until the minimum pension payments exceed the income produced by the SMSF.

At age 85 I can sell some shares to satisfy the minimum pension requirement and repurchase them in another ownership vehicle and the dividend stream continues as before. Eventually, at age 120, the increasing minimum pension payments will remove all my money from the SMSF and ensure that the income from the portfolio is taxed normally.

The tax is higher outside super, so my income then is lower. Given that the growth in income from dividends has exceeded inflation for 25 years there should still be more than adequate income and I should still not need to sacrifice capital to pay for living costs.

My point is that with sufficient income, I can sit out any downturn, so falling share prices have no effect on my investment strategy and anyway my income depends on company profits and dividends, not prices. As long as I am not selling any assets, volatility is not a risk I need to manage.

Related posts:

1. SATO: Cutting seniors tax via super contributions no longer possible
2. SMSF investment: Franked dividends and the 45-day rule
3. SMSFs: Purchasing options is OK, and even sometimes CFDs

The Government has announced that pension payment relief will be available for the 2012/2013 year as well as for the 2011/2012 financial year. This is great news for retirees suffering through the poor-performing sharemarkets but I had hoped that Australians still recovering from the Global Financial Crisis would receive the 50% drawdown relief on account-based pension minimum payments that they had received for the previous 3 years. I had also hoped the Federal Government would have increased the 25% relief to 50% relief for the 2011/2012 in light of the shocking investment markets this financial year.

Okay, 50% relief is no longer available but the good news is that you can still take advantage of a certain level of drawdown relief, but just not as much relief as in earlier years. The Federal Government has deemed that you only have to withdraw 75% of the legislated minimum pension payments for the 2011/2012 and 2012/2013 years.

What the modified extension of payment relief means for individuals receiving superannuation income streams, is that for the 2011/2012 and 2012/2013 years, the minimum payment amounts for account-based pensions will be 75% of the normal requirements. For example, an individual aged 65 must withdraw 3.75% of his account balance for the 2011/2012 year, rather than 5% under the regular minimum pension payment rules.

Presumably, like previous years, the temporary minimum pension payment relief applies to account-based pensions and annuities (payable since 1 July 2007); allocated pensions and annuities, and market-linked (term allocated) pensions and annuities. This change requires amendments to the Superannuation Industry (Supervision) Regulations 1994 and the Retirement Savings Accounts Regulations 1997. The changes have been made for the 2011/2012 year but are yet to be made for the 2012/2013 year.

I have received many emails from readers asking me about whether the drawdown relief for the 2011/2012 year will increase to 50% so I imagine Bill Shorten’s announcement may be a little disappointing. For other readers, any relief may potentially be great news for retirees taking superannuation pensions, especially those still trying to rebuild account balances savaged during the Global Financial Crisis.

The minimum pension payments will return to normal from the 2013/2014 financial year.

Note: Amount calculated on 1 July each year, unless first year of account-based income stream, and then pro-rated from commencement day. Minimum amount to be rounded to nearest $10.

Source: Adapted from Schedule 7, Superannuation Industry (Supervision) Regulations 1994 and Federal Government news releases dated 18 February 2009, and 12 May 2009, and 30 June 2010, and 29 November 2011. Figures for 2011/2012 year and 2012/2013 year calculated by Trish Power.

Background: If you have an account-based pension (or the older-style allocated pension) you must pay a minimum amount at least annually. If you’re aged 65 to 74, the usual minimum pension payment for an account-based pension is 5% of your pension’s account balance. Under the temporary relief, you are required to withdraw a minimum of 3.75% of your account balance as at 1 July 2011 (for the 2011/2012 year). For example, Robert is 68 and has $500,000 in his pension account. His minimum pension payment is $25,000 under the regular pension payment rules, but under the temporary relief his minimum payment is $18,750.

Related posts:

1. What a relief! Minimum pension payments halved for 2010/2011 year
2. THE SOAPBOX: Government must grant greater relief on minimum pension payments
3. Minimum pension payment: At what date do you determine the age for payment calculation?

In an attempt to protect the 2012/2013 Federal Budget surplus which was promised after the Global Financial Crisis savaged world economies, and then re-promised in the May 2011 Budget, Federal Treasurer Wayne Swan has tinkered with the super rules, yet again. On 29 November 2011, Wayne Swan released the 2011/2012 Mid-year Economic and Fiscal Outlook. As part of this Outlook, Mr Swan announced three superannuation changes that will negatively impact on the super savings of Australians. He also announced a one-year extension to a measure that would relieve some of the financial pressure for retired Australians. The superannuation changes are:

• Freeze indexation of contributions caps for the 2013/2014 year (but also for the 2012/2013 year)
• Halve co-contribution payments and reduce income threshold for eligibility from 1 July 2012
• Changes to the yet-to-be-introduced Low Income Superannuation Contribution (to be introduced from 1 July 2012) to exclude some low-income earners
• Extend 25% minimum pension payment relief for 2012/2013 year, in addition to the 2011/2012 year

I explain each of these changes below.

Freeze indexation of contributions cap for the 2012/2013 and 2013/2014 years

I believe this policy change is ridiculous for two reasons. First, the Government is not being honest about the length of time the freezing of the caps is to last. In the Mid-year Outlook it states that the concessional cap will be frozen for the 2013/2014 year and remain at $25,000, when the Government then expects the cap to increase to $30,000 from the 2014/2015 year. My understanding is  that the concessional cap was to increase to $30,000 from the 2012/2013 (from July 2012) and not from 2013/2014 year, which means the Government is freezing the caps for 2 years. I remind our SuperGuide readers that the contributions caps were not indexed when they were supposed to be in July 2009. Instead the Government halved the concessional (before-tax) contributions caps and then announced indexation of both caps would commence from July 2009. By taking this approach the Government not only froze indexation but rolled back accumulated increases in the cap that would trigger an adjustment in the caps. Since the new caps were originally introduced in July 2007, the contributions caps have never been adjusted in line with inflation. Some may consider this trend to mean the contributions caps are on a permanent freeze. Note: The over-50s concessional cap and the non-concessional cap will also be frozen for 2 years, even though the Government states it is frozen for only one year. The second reason why I think this policy change is ridiculous is that we currently have tens of thousands of Australians paying excess contributions tax on super contributions due to poorly implemented contributions caps. The amount the Government is collecting in unfairly imposed excess contributions tax should be enough suffering by super savers ‘for the budget surplus cause’, rather than tinkering with the contributions caps yet again. Fix the excess contributions tax issue first before upsetting the retirement plans of Australians yet again. Note:The Government estimates the freezing of the contributions caps will save $485 million over 2 years.

Cut co-contribution payments by half from 1 July 2012

The Government has announced that it will halve the matching rate (currently $1 co-contribution for $1 voluntary non-concessional contribution up to a maximum amount) and halve the maximum co-contribution payment (currently $1,000 which was recently reduced from $1,500). What this means is that the Government will halve the co-contribution matching rate to 50 cents for every dollar contributed, and the maximum co-contribution payment will fall to $500. What this means is that eligible Australians who contribute up to $1,000 in non-concessional contributions will receive a maximum co-contribution of $500. I remind our SuperGuide readers that the Government has previously announced that the maximum co-contribution payment would increase to $1,250 for the 2012/2013 and 2013/2014 years and then eventually return to $1,500 from 1 July 2014. The Government also froze the income thresholds for co-contribution eligibility for the 2010/2011 and 2011/2012 years. The co-contribution will never return to $1,500 and it will never return to $1,000 after this year. That’s not the end of the bad news. The Government also intends to lower the income thresholds for testing an individual’s entitlement to a co-contribution. The current income thresholds are $31,920 (lower) and $61,920 (upper). From 1 July 2012, if you earn more than $46,920 you will not be entitled to a co-contribution, although it appears that the lower threshold is remaining at $31,920 for the moment. The Government believes the Low-Income Superannuation Contribution (see next policy measure below) is a better policy and will help more low-income earners. I agree that the Low Income Superannuation Contribution (LISC) is a fair and long-awaited policy but if it is being introduced to replace the co-contribution, why is the co-contribution cut being announced as a budget measure to reduce expenditure (by a whopping $1 billion over 3 years) in order to keep the Government in surplus? For goodness sake, at least be honest about the destruction of the co-contribution scheme to meet the surplus rather than attempting to make it some noble decision that makes those affected better off. Note:The co-contribution cuts are designed to fund a third of the cost of the LISC policy. The Government estimates that by cutting the co-contribution it can save $660 million (but didn’t I read $1.023 billion in the estimates?) which is around one-third of the cost of the low income superannuation contribution ($1.9 billion over 3 years).

Changes to Low Income Superannuation Contribution (LISC)

In its response to the Henry Tax Review, the Government announced that from 1 July 2012, individuals earning up to $37,000 will be no worse off tax-wise by receiving Superannuation Guarantee contributions. Any tax deducted from superannuation guarantee (SG) contributions made on behalf of individuals earning less than $37,000 will be returned to the super accounts of the affected individuals. The Government has announced some changes to the implementation of this policy which I will explain after I outline how the LISC works In the past, SuperGuide has flagged that Australians earning less than $37,000, that is, those paying 15 cents tax or less in the dollar, received no tax incentives to save for retirement. In some cases, Australian workers who paid less than 15 cents in the dollar income tax, ended up being penalised tax-wise by the superannuation system. For example, you may not pay any tax on your personal income due to the level of income that you earn, but if your employer paid Superannuation Guarantee contributions into your super fund, those contributions were hit with 15% contributions tax. What this means, is that workers on lower incomes are being financially penalised by the superannuation system rather than receiving tax incentives. Under the LISC policy, the 15 per cent contributions tax will be refunded into their superannuation accounts. Individuals can expect a refund of contributions taxof up to $500 each year, paid into the super accounts of Australians earning $37,000 or less, to ensure they receive a similar incentive for retirement savings, as Australians on higher incomes. According to the Federal Government, “The LISC will benefit over three times as many low-income earners as the current co-contribution, and is better targeted in boosting retirement savings. This is because low-income earners can only access the co-contribution if they make additional superannuation contributions from their income or savings, whereas all low-income earners who receive compulsory SG contributions will automatically benefit from the new initiative.” Well, I’m not so sure that ‘all low-income earners’ will benefit from the LISC. The Government has announced some changes to the LISC as part of its strategy to keep the budget in surplus. Those changes are:

• Individuals who receive less than 10 per cent of their income through employment or business will not be eligible, which means there will be many thousands of low-income earning Australians (more than 50,000 and probably more, on my calculations).

• Individuals only receive a payment if their LISC entitlement is at least $20, to reduce administration costs. This change is more understandable from a practical point of view, but from an equity point of view, this change means that there will still be many Aussie paying higher rates of tax on their SG payments than what they pay on their personal income. That doesn’t seem very fair to me, but in this instance the cost of paying out $10 or $5 would not justify the tax benefit.

A reasonably positive change to the LISC is that the Government has introduced a verification process to remove the requirement for low-income earners to lodge a tax return solely to receive the tax refund under the LISC. Instead, the Australian Taxation Office (ATO) will verify an individual’s income using available data. According to Government estimates, this small change in administration will ensure that an additional 100,000 individuals earning up to $37,000 will now receive the LISC. Note:According to the Government, about $3.6 million Australians will receive a tax refund, which includes 2.1 million (but I bet you many of them would have preferred the $1000 or $1500 co-contribution that used to be available).

Extend 25% minimum pension payment relief for 2012/2013 year

According to the Government, “around 125,000 self-funded retirees will benefit from an extension of drawdown relief for account-based pensions to the 2012-13 year, with a 25 per cent reduction in the minimum payment amounts for these products” (Bill Shorten Media Release No 162, 29 November 2011) Previously, the Government halved the minimum payment amounts for account-based pensions for the 2008/2009, 2009/2010 and 2010/2011 financial years, and a 25% reduction is currently available for the 2011/2012 year. For more information on this measure, including specific minimum pension payment percentages, see separate SuperGuide article  What a relief! Minimum pension payments reduced by 25% for 2011/2012 and 2012/2013 years. Image by Nick Stenning.

Related posts:

1. Super contributions: Juggling two caps is not excessive
2. Watch the (contributions) caps when super sailing
3. Contributions caps relate to financial years, not calendar years

Clearly, we are not the only ones who believed that denying individuals Superannuation Guarantee payments when choosing to work beyond age 69 was discriminatory. According to Minister for Superannuation, Bill Shorten, his decision to remove the age limit for Superannuation Guarantee was due to peer group pressure. He says: “As a result of strong representations from members of the Labor caucus and cross-bench, including Yvette D’Ath, Shayne Neumann, Deb O’Neill, Michelle Rowland, Rob Oakeshott and Tony Windsor, I have decided there will be no age limit for superannuation guarantee contributions (Media Release No 146, 2 November 2011)”.

The original plan by the Government (announced as part of the Government’s response to the Henry Tax Review) was to increase the age for SG entitlement to 74, from the current age of 69. Due to intense lobbying by the MPs mentioned above, Minister Shorten has totally removed the upper age limit for SG entitlements.

Note: Until the rules change from July 2013, individuals aged 70 to 74 are currently able to make voluntary concessional (before-tax) or non-concessional (after-tax) superannuation contributions, subject to meeting a work test.

Background: For previous articles about SG discrimination for older workers, check out the links below:

• Superannuation Guarantee now fairer to older workers
• Mr Shorten, Here’s your superannuation to-do list
• No SG for over-70s: now, that’s not fair

Related posts:

1. Superannuation Guarantee now fairer to older workers
2. Super for beginners, part 18: My employer hasn’t paid my SG. What can I do?
3. What a relief! Minimum pension payments reduced by 25% for 2011/2012 and 2012/2013 years

Too dramatic, perhaps? I don’t think so. The world that women live in is slowly changing, but most women have been raised to think of others before themselves. If a woman thinks of her own needs, she may even be considered selfish, by others or even by herself.

Thinking of others is an admirable quality, but it’s possible to look after your own needs and still do great things for others. Sometimes, it can take an entire lifetime before a woman discovers that the best way to look after other people is to look after herself as well.

I can almost hear you say: ‘Hey, I thought superannuation was about wealth accumulation, not about self-help theories. For those who may be holding the view that wealth accumulation is just about money, I ask the following question: until now, what’s stopped many women from thinking about saving for retirement?

Naming the top 14 monkeys holding back super plans

From my conversations with thousands of women over the years, I have compiled a list of the top 14 monkeys that seem to sit on the backs of many women, and stop them from taking super control.

1. Superannuation is boring.
2. I don’t know enough about investing and super.
3. I only have $15 000 in super. What’s the point?
4. I can’t afford to buy a house: retirement is the least of my worries.
5. Paying off my house is more important than putting money into super.
6. I’m not working, so how can I possibly think about saving for retirement?
7. I’m too busy with my kids to think about super and investing.
8. We have a mortgage and we are paying school fees — we have no spare cash to put into super.
9. I’m divorced and raising children — I don’t think I’ll ever be able to retire.
10. I’m in my fifties, and now it’s too late.
11. My husband/partner is my retirement plan.
12. My husband/partner looks after all of our finances.
13. I have super but I don’t know where it is.
14. I’m self-employed and superannuation is not a priority.

The 14 monkeys listed above are featured in one chapter of my book Super Freedom: A woman’s guide to superannuation (Wrightbooks, $32.95). In Chapter 2, I explain how to easily remove each monkey from your back. For example, my response to Monkey 12 is set out below.

Monkey 12: My husband/partner looks after all of our finances 

The first problem for all of us, men and women, is not to learn, but to unlearn.

Gloria Steinem, feminist and political activist

Since the traditional 1950s, the world has changed a lot, but if you’re female and over the age of 50 you were probably part of what I call the princess generation — your mother, or father, instilled in you that the deal was to get married (to a handsome prince) and then your husband would look after you, and look after the finances.

It wasn’t that long ago that a woman couldn’t get a bank loan without a man, or start a business without a man, or be taken seriously unless a man was supporting her point of view. For example, I have a friend in her early forties who was denied a bank loan in her twenties because she might get pregnant.

If you have children and you have stopped work for a while, you may have passed financial control over to your spouse because he is earning the income (see monkey 11). In many relationships, the usual practice is to divide up the responsibilities of the household for convenience, or to suit each partner’s strengths. Many women are the money managers in households in terms of budgeting and household bills, but from my many chats with women, many more men than women look after the family investments (if any), although this traditional split of roles has been slowly changing in recent times.

If you’re not involved in your family’s finances or investments, I suggest you ask your partner the following questions:

1. What are the names of our super funds?
2. How much money do we have in each of our superannuation accounts?
3. How much super does my employer and your employer contribute each year?
4. How much credit card debt do we have?
5. Do we have any outstanding household bills?
6. How much do we owe on our home loan, and other loans?
7. How is our retirement plan going?

If your partner cannot answer all of these questions, then I suggest you take a greater interest in your finances and your future financial security. Super Freedom will help you answer questions 1, 2, 3 and 7 from the list above.

*a monkey is a problem (real or imagined) that stops people from taking action. The common expression is usually that a person has a monkey on their back.

Source: An edited extract from Chapter 2 of Trish Power’s book Super Freedom: A woman’s guide to superannuation (Wrightbooks, $32.95) For more information about the book click on this link.

Related posts:

1. Women and super: A worry-free financial future in 6 steps
2. THE SOAPBOX: Women and carers ignored by super law-makers
3. Why women have to save more in super

A male friend of mine suggested I should just add a supplement chapter to one of my existing books, explaining the special issues women face when planning for retirement. On the surface, his suggestion had merit because my existing books were certainly written with both female and male readers in mind, but as you probably already know, there are bigger issues playing out for women wanting to create a better life for themselves in retirement.

My latest book, Super Freedom: A woman’s guide to superannuation (Wrightbooks, $32.95) can help women discover how to create a better life financially in six steps, and you don’t have to spend thousands of dollars in financial advice to make this happen.

Women have different life experiences to men

Although we may all like to think women and men are the same in terms of money and finance, women generally have different life experiences to men, such as:

• earning less (on average)
• living longer than men (on average); which generally means women need to save more for retirement than men, or live a more modest life in retirement
• taking time out of the workforce to bring up children
• continuing to be the main carer of children from a marriage or other type of previous relationship in the event of divorce or separation
• reducing or rescheduling work hours to care for an elderly parent, or parents
• for most women in their fifties or older, not being given the option of having a super account until much later in life, if at all.

The major difference between a man and woman, when saving for retirement, is directly linked to the fact that the most popular way of saving for retirement is through Australia’s superannuation (super) system. The Australian super system was originally designed for a traditional male who worked full time for 35 years and remained married to the one person for his entire life. If you don’t fit into the traditional male definition — and most women (and some men) don’t — then you definitely need to be more hands-on with your retirement planning.

I have spoken at many seminars where women in the audience would approach me after the presentation and say, for example: ‘now I understand what my superannuation savings can create for me — why didn’t someone tell me this earlier?’ Other women would comment on the fact that I talked their language, rather than the language of the money men.

It was fantastic to receive such lovely feedback from seminar participants, but I also appreciated that there is a real problem. Although the superannuation industry is spending millions of dollars to encourage Australians to think about planning for retirement, many women are not hearing the message. Although the government is offering tax incentives to save for retirement by using a superannuation fund, many women are not taking advantage of these incentives. Why not?

I have worked in, or written about, the superannuation industry for nearly 25 years, and the answer to this question is now patently clear to me. Many women haven’t been heeding the plan for retirement message because most of the information available about superannuation and retirement is not targeted towards women; rather, it is targeted towards some average person that rarely resembles a female.

Women learn differently to men on money matters

From my thousands of conversations with women over the years, I believe that many women believe that financial freedom, particularly in retirement, is not possible. A financially stress-free retirement is indeed possible, and the easiest way to achieve this dream is by getting to know how the superannuation rules can benefit you.

In terms of finance and money, women often learn differently to men. Women like to discover the benefits of a product or service, or what it can deliver for them. Men like to do that too but many men also love to get under the hood and see how something works. In my experience, the process of how superannuation works seems to engage the blokes more than the women, and for some crazy reason the main focus in Australia seems to be on the process of saving for your retirement — typically the superannuation rules — when I believe the focus should be more on the outcome — wanting a comfortable life in retirement.

Clearly the super rules are essential information, but such information is most helpful when you know what lifestyle you want in retirement, and how much money is necessary — your retirement target — to deliver that lifestyle. You can then use the superannuation rules to help you reach your retirement target. In other words, much of the information available on retirement planning explains what the super rules are, rather than explaining how you can create the retirement lifestyle that you want by using the super rules. Super Freedom: A woman’s guide to superannuation (Wrightbooks) is different, and the information is tailored to the life experiences of women, and uses case studies to illustrate how doing a little can dramatically improve your retirement lifestyle, and doing a lot can totally transform your life after work or raising children.

Women are a diverse group facing unique challenges

The superannuation system has certainly improved over the years, although women who don’t work full time, or women who are self-employed, definitely have to think more creatively when it comes to saving and planning for retirement. What’s new? I believe thinking outside the box has always been a necessity for women, and this can reap unexpected financial rewards. For instance, you may be surprised by the fact that a study has shown that women are better investors than men. I share some of the findings from this fascinating study in Super Freedom.

Women often have to work smarter, think smarter and tailor a standard system to suit their unique needs. Fortunately, women are highly adept at doing this because most women, in most parts of their life, are facing similar issues, whether it be raising children, managing work–life balance, tackling the boy’s club in society or traditionally male workplaces, or working in under-valued female-dominated industries.

Super Freedom deals with all types of women, although I do want to make an important point about women who may be single or divorced or widowed. Most women at some stage in their lives will live alone — either by choice or by circumstance. If you’re a woman, you may never marry; you may be single before you marry; you may divorce; you may outlive your husband or partner; or you may end up living apart because your partner (or you) suffers aged-related illness. Many wealth accumulation books don’t cater for women living on their own, but my book certainly does.

The aim of my book is to help Australian women (although men will find the book useful as well) work out the steps necessary to create a worry-free lifestyle in retirement, and superannuation just happens to be one of the easiest ways to get there. Every woman deserves the opportunity to discover her own retirement dream, and this book gives some handy tools to help make that dream come true.

If there is a single message I hope all readers will take from Super Freedom, it is that it is never too late, or too early, to improve your financial circumstances.

SPECIAL OFFER AVAILABLE UNTIL 16 DECEMBER 2011: If you want to buy Super Freedom for yourself, or for your daughter, mother, sister, aunty, wife or a friend, as a special offer to SuperGuide readers, I will sign all copies of my book Super Freedom ordered through our online book store (managed by bookstore Educated Investor). Catering for the Christmas rush and delivery times, this offer closes on 16 December 2011. Allow several days for delivery. Click on the book link on the right hand side of the website, or click on the book below to find out more information and to order the book.

Super Freedom: A Women’s Guide To Superannuation

(Wrightbooks, $32.95)

Learn more about Super Freedom: A Women’s Guide To Superannuation

Please note when you order a book by clicking on the link above, you will be leaving the SuperGuide site and visiting the Educated Investor website. The Educated Investor is an online bookstore and one of SuperGuide’s trusted partners.

Related posts:

1. Case study: female, 45 and a worry-free financial future
2. Monkeys* stop women taking control of super
3. Retirement planning in six steps

The more disturbing fact for Australian superannuation account holders is that long-term investment values have stalled at pre-October 2007 levels, while we all wait for the investment markets to fully recover. The median annual return for a growth super fund over the 5-year period to 30 September 2011, is a measly 0.8% per year, although over the 10-year period to 30 September the median annual return is 5.5% per year, according to Chant West. For the higher risk investment options, the median annual return over a 5-year period is in the negative, which means that for the past 5 years, on average, the higher risk options (with 80% or more of assets invested in growth assets such as shares and listed property trusts) have lost money every year!

According to rating company, Chant West, Australian super fund members will have to wait two more years to recoup the value of their super savings as at October 2007. Although this is rather depressing news, super fund returns had been in positive territory for the previous two financial years (2009/2010 and 2010/2011).

What has been your reaction to the GFC? Have you adopted a ‘wait and see’ strategy, or have you switched investment options, or even stopped making super contributions?

For many Australians, especially retirees, it is a frustrating time and for some retirees, a financially devastating time.

At some stage, most investors will accept that we can’t turn back time, and that much of the impact of the GFC is outside our control. It is possible however to soften the impact on our personal wealth from the long-term consequences of the GFC and the volatile post-GFC recovery phase. Even in these uncertain times, we can take some positive action to improve our financial circumstances, and rebuild our retirement savings. For a large number of Australians this positive action has taken the form of increased cash holdings or reducing debt.

How are you going to rebuild your savings in the post-GFC era?

I have compiled a list of 10 practical and common-sense (unless you have lost faith in super) strategies that individuals can consider as a means to take back control of their wealth accumulation plans.

Warning: Due to the recent volatility in super fund returns, some of the strategies outlined below may require you to ‘keep the faith’ that super fund account returns will continue to trend towards the 20-year long-term average of 7% a year (see article 20 years of SG delivers 7% a year).

1.   Adjust your income during your working life

Harsh as it may sound, some Australians will have to work longer hours or even delay retirement. For many working baby boomers the GFC has meant making the decision to delay retirement, and for retirees, a return to the workforce (see Strategy 9). Your level of income can affect your wealth accumulation plans in at least four ways:

• Your employer contributes the equivalent of 9 per cent of your salary to your super fund under the superannuation guarantee rules, which means the higher your income, the larger your employer’s contribution will be, subject to an upper salary limit.
• If you’re self-employed, then you must take positive action to build your super benefit or private savings.
• If you enjoy an above-average income, you may have higher expectations for your lifestyle in retirement than an individual on a lower income, and you’re likely to have more disposable income to redirect to superannuation or other type of savings plan.
• Earning an income for longer means that you are not relying on your savings to live, preserving your capital for longer.

2. Manage your tax bill

The more tax you have to pay on your personal income, and other investments, the less money is available to invest for your financial future. Tax-friendly investments such as superannuation can help Australians reach their financial goals faster because, depending on your income, less money is snuffled up by the taxman. Super may be the last place you can imagine placing your hard-earned savings after the roller-coaster investment ride of the past 3 years, but if you’re accustomed to using tax-minimisation strategies to reduce tax and boost savings, then super, or other tax-effective strategies such as negatively gearing an investment property are likely to become popular again. In terms of super, the higher your income, the more likely that you will choose to make before-tax (concessional) super contributions, rather than after-tax (non-concessional) contributions, because you can save thousands of dollars in tax this way. Remember, most retirees can expect to pay no tax in retirement if their savings are in the super system.

3. Review your level of super contributions — one-off or regular contributions.

If you add more money to an existing pool of money, you will obviously have a bigger pool of money. Likewise, if you make additional super contributions, you can expect your superannuation balance to grow faster. You also have another element boosting your super savings — compound earnings (or losses in recent times, although long-term returns may trend back to 7% a year). Your superannuation account receives returns or earnings from your super fund’s investments, and then those earnings are re-invested with the balance of your super account, giving you even more returns (eventually!). Compound earnings, plus regular additional contributions, or even one-off contributions, can accelerate the growth of your super account over time.

4.  Maximise years of contributions.

The longer the timeframe in which you make regular contributions, the more money is invested over time for your retirement. More contributions from you (and your employer) means a larger pool of savings, and your super account reaps the benefits of compound earnings (assuming super fund returns revert to long-term averages) for a longer period of time, creating a larger final super balance.

5. Decide on desired rate of investment return.

The return, or earnings, on your superannuation account or other non-super savings, is the key contributor to wealth accumulation. If you want higher returns, you generally have to take higher risks, which can mean investment losses in some years. For some individuals, losing money is too stressful and they would rather opt for an asset allocation that delivers a moderate long-term return, and invest for a longer period, or contribute more regularly, or even delay retirement to accumulate a larger super balance. (You may decide to review your super fund as well.) In case studies and examples published on this website, I use 7 per cent after fees and taxes as the assumed rate of return.

6. Decide on years that you hold investments or hold your super account.

Time is the key when accumulating wealth. You let compound earnings weave their magic and, if you choose, you can rev up your superannuation savings with additional super contributions. If you don’t have time on your side, however, then you may have no choice but to contribute more money, or take more risks when investing, or decide to accept a less costly lifestyle in retirement. Note that taking more risks also means that you have a higher chance of losing some of your savings.

7. Manage level of fees.

Fees, like taxes, are the hidden enemies of investors, although fees are necessary if you’re planning to rely on someone else to invest your super money. Even when you choose to run your own super fund (a self managed super fund) you will still encounter fees. The trick is to manage the amount of fees that you have to pay. The key to accumulating wealth, however, is the return on your investments — maximising the long-term return after fees and taxes.

8. Review your proposed retirement age.

If you retire too early, you can miss out on important extra years for accumulating wealth for your retirement. A further disadvantage when you retire too early, is that you need to save more for your retirement because you will need to finance more years in retirement. Generally speaking, the earlier you retire, the smaller your super payout is, and the longer it has to last. In comparison, the later you retire, the larger your super account balance and you then also have fewer years in retirement to finance with your lump sum.

9. Working (and contributing to super) in retirement.

If you’re willing to continue working when you retire, especially if you plan to retire before Age Pension age, the amount of money that you need on retirement is a lot less, because you’re providing a second income stream sourced from your work income. If this is an option you’re considering, then you need to be very particular about your plans, because most individuals choosing this option work only for the first few years of their retirement, and then rely solely on superannuation and non-super savings, and the Age Pension (if they are eligible). If you’re retired, then returning to return to full-time or part-time work can protect your capital and allow you to rebuild your savings.

10. Receiving an inheritance or other lump sum payment.

You may receive an inheritance later in life, or other lump sum (such as the proceeds from a divorce settlement or sale of a property) that you can put towards your wealth accumulation plans.

Related posts:

1. THE SOAPBOX: Is your super fund gambling with your retirement savings?
2. Ban unhedged international shares in default investment options
3. 2012 checklist: 10 super tips for a financially healthy retirement

Looking longer term, the median superannuation growth fund has suffered a loss of 0.4% for the 12 months to 30 September 2011, and a median annual return of 5.5% for the 10-year period to 30 September 2011, according to Chant West,

Chant West director, Warren Chant, says: “The past quarter has brought back dark memories of the GFC. The difference this time, however, is that most major companies, in Australia and elsewhere, have strengthened their balance sheets and are in a much healthier position than they were then. While world growth is slowing, there is some light at the end of the tunnel as long as the US stays out of recession. But first, the debt issues in Europe need to be tackled speedily and decisively.

“At the end of the 2010/11 financial year, the typical growth fund required about 6% to return to its pre-GFC high which was achieved in late October 2007. Unfortunately, that shortfall has now blown out to 11%. Even if funds were to meet their typical performance objective of about 7% per annum, it would still take between one and two years to make that up.”

Based on Chant West’s rankings, a growth fund typically holds between 61% and 80% in growth assets such as shares and property. A median is simply choosing the return for the fund in the middle of the list.

Although the term ‘growth fund’ covers those super funds with investment options having a 61% to 80% allocation to growth assets, some super funds describe the identical asset allocation as ‘balanced’ option. Chant West’s description of ‘balanced’ however is 41% to 60% in growth assets.

The returns for Chant West’s version of ‘balanced’ option are 1.8% for the 12 months to 30 September 2011, and an investment loss of 1.9% for the month of September. You can find more detail on the investment returns for growth or balanced options in the table below.

The balanced/growth asset allocation is the default option for most large super funds which means that at least 80% of all super fund members have their superannuation money invested via a growth or balanced investment option. If you don’t actively choose your investment options for your super account, then your retirement savings will be invested in the default option.

If you do actively choose your investment option/s then your super savings may be invested in another type of investment option such as conservative or high growth.

The table below lists the performance figures for the five main asset allocations for: 1 month, 3 months, 1 year, 3 years, 5 years, 7 years, 10 years.

Note: Performance is shown net of investment fees and tax. It does not include administration fees or adviser commissions. Negative returns appear as follows: -5.1% means a loss of 5.1%.

Source: Chant West 24 October 2011 media release (www.chantwest.com.au)

Industry funds outperform retail funds, again

According to Chant West, the growth investment options for industry super funds outperformed similar investment options in master trusts/retail funds for the month of September, with industry funds delivering a loss of 1.9% for the month and master trusts/retail funds delivering a loss of 2.7%.

Note: If you annualise this return over 12 months it works out to be a massive 9.6% advantage to industry funds in terms of returns. If this were to occur over a long period, then a member of an industry super fund would end up with a substantially larger super benefit than the member of the master trust, assuming everything else was equal.

Clearly, a period of one month is a very misleading marker for long-term investment performance, although industry super funds have generally outperformed master trusts over the longer term, with some occasional exceptions.

Industry super funds (return of 0.4%) outperformed retail funds (loss of 2.0%) for the 12 months to 30 September 2011, and again for 7 years to 30 September 2011 with industry funds delivering a return of 5.0%, compared with a return of 3.9% for retail funds.

Over the past 10 years to 30 September 2011, industry super funds have outperformed master trusts/retail super funds by 1.4% per annum, returning an annualised 5.7% (industry funds) compared with 4.3% (master trust/retail super funds).

Note: Performance is shown net of investment fees and tax. It does not include administration fees or adviser commissions. Negative returns appear as follows: -5.1% means a loss of 5.1%.

Source: Chant West 24 October 2011 media release (www.chantwest.com.au)

Related posts:

1. Super funds gain 3.1% for October 2011 (but lose 2.4% for year to date)
2. Super funds deliver 5.6% for 12 months to March 2011
3. Super funds deliver 8.6% for 12 months to May 2011

Successive Federal Governments have made it clear that the Age Pension will always be available but an ageing and growing population means that Australia cannot continue supporting Australians at the same level without reviewing and altering the country’s revenue base, or reducing spending.

In the 1960s, the average period for receiving a government age pension was six years, among OECD (Organisation for Economic Co-operation and Development) countries, reflecting lower life expectancies. In the future, the average period for claiming a government age pension is expected to be between 30 and 40 years, which will place huge financial pressure on a country’s finances. OECD members are predominantly European nations, although Australia, Japan, Korea, Mexico and the United States of America are also members.

The average life expectancy for Australians at age 65 is nearly 22 years for a female, and 18.5 years for a male. The longer you live the better your average life expectancy becomes. For example, if you reach the average life expectancy that you had at 65, that is, you reach the age of 87 for a female, and 83.5 years for a male, then you can expect to live another 6 or so years. The average life expectancy for an Australian female aged 87 is 6.11 years (reaching the age of 93), and for a male aged 83.5 years, roughly 6.5 years (reaching the age of 90). If you retire before the age of 65, and many Australians do, then you can expect a potential retirement of more than 30 years. I provide the average life expectancy for all ages in the article Life expectancy: Will you outlive your retirement savings?

Will Australia run out of money?

Around one-third of all Federal Government spending is devoted to Centrelink payments such as unemployment benefits, parenting payments and the Age Pension. According to the Department of Treasury, the increased demand for health and aged care spending by an ageing population, and more specifically, the increasing demand for the latest medical technology and procedures, plus other public spending demands such as Centrelink payments, means that Australia could run out of financial steam within 40 years, if we continue on our merry way. According to the 2010 Intergenerational Report (IGR), unless action is taken, we can expect that by 2050 Australia will be spending more than it receives in revenue by 2.75% of gross domestic product (GDP). Removing the impact of the recent economic stimulus package, which was a temporary spending splurge, the Federal Government believes the factors set out below are the key to reversing this gap between Australia’s spending and earning:

• Enhancing productivity growth (producing more output with proportionately fewer workers, by improving skills, giving access to training and investing in infrastructure)
• Improving workforce participation (in particular increasing participation by older workers and women)
• Managing the costs of an ageing population, including health reform
• Tackling the costs of climate change
• Implementing pension reform (specifically Age Pension reform).

The hard fact that we all have to face is that the proportion of Australia’s population of traditional working age will nearly halve within 40 years which means there will be fewer workers financing the Age Pension and health costs of the retired and other non-working Australians. According to the IGR, the number of people of working age to support every person aged 65 years and over is projected to decline to 2.7 people by 2050 (compared with 5 people now). Around quarter of all Australians will be aged 65 or over by 2050.

Europe increases pension age

Funding an ageing population is clearly not only an Australian dilemma. The Global Financial Crisis (GFC) has forced the hand of many European nations in tackling the funding dilemma caused by an ageing population. Here’s a sample of how countries in Europe are dealing with long-life pensions:

• France: Raising the retirement age from 60 to 62 by 2018
• Greece: Considering boosting average retirement age from 60 to 63, and requiring 40 years of work (rather than 37) for full pension
• Russia: Considering lifting the retirement age by 5 years: from 55 to 60 for women, and from 60 to 65 for men. Apparently, the average life expectancy for men in Russia is only 59 years! In effect, eliminating the age pension for at least half of all Russian men.
• Germany: In 2007, raised the pension age from 65 to 67
• Ireland: Increased the public service pension age from 65 to 66
• United Kingdom: Increasing the state pension age from 65 to 66 by 2020, from 66 to 67 by 2036 (but considering bringing forward to 2026), and from 67 to 68 by 2046 (but considering bringing forward to 2036)

A case study: Italy

In October 2003, millions of Italians went on strike for half a day protesting the Italian government’s plans to increase the retirement age to ease the financial pressure on Italy’s pension system. At the time, an Italian worker must have paid into the country’s pension system for 35 years before retiring at a minimum age of 57. The strike was to no avail. The Italian government raised the age for entitlement to a full pension to 60 rather than 57 (effective since 2008), and increased the years of contributing to the system to 40 years, from 35. The age for entitlement under the contribution rules has since increased to 62, and from 2050 will rise to 65 years and 4 months. Entitlement to the Italian pension is also available to men aged 65 or over, and women aged 60 or over, provided they have contributed for at least 20 years. Anyone who has contributed for 40 years can retire at any age. The Italian pension system apparently costs the country about 15 per cent of gross domestic product, which is set to increase even more with an ageing population and longer life expectancies. By 2040, Italy will have 96 pensioners for every 100 workers!

How is Australia tackling the costs of living longer?

In many ways, Australia is fortunate that it has relatively developed retirement policies. Australia’s Retirement Income Policy has three limbs that the Federal Government hopes can raise everyone’s standard of living beyond relying solely on the Age Pension:

• Safety net. The Age Pension provides a taxpayer-funded basic retirement income for those people who can’t fully support themselves. The single rate Age Pension is set to at least 25 per cent of Male Total Average Weekly Earnings. The Age Pension age is currently age 65 (and 64 for women) and is increasing in six-month increments to age 67 for those born after a certain date. For more information see the article Take note: Age Pension increasing to 67 years.
• Super for everyone (SG). Superannuation Guarantee (SG) is the official term for compulsory super contributions made by employers on behalf of their employees. More than 90 per cent of employees receive SG, which is considered a minimum level of super and not necessarily enough to provide a comfortable retirement, especially if you enjoy the good life. Your employer must contribute the equivalent of 9 per cent of your salary, although SG started at 3 per cent of salary in 1992 and rose to 9 per cent from 1 July 2002. The Federal Government has announced that SG is set to increase to 12% by July 2019, although the successful implementation of this policy is uncertain with the ALP running a minority government. For more information about the proposed SG increase see the article  Superannuation Guarantee set to jump 33%
• Top-up option with voluntary savings. You can make voluntary super contributions or have savings outside of super to boost your retirement kitty. Super is a tax-effective option for most Australians because the Government taxes super at a concessional rate and you pay a rate of tax that is less than what you would ordinarily pay on income you receive during the year. The Government gives self-employed people and others the opportunity to claim tax deductions when they make contributions.

The Federal Government is very keen for Aussies to boost their retirement savings by making their own super contributions. In 2003, the Government introduced one of its more innovative policies called the super co-contribution scheme. The Government puts extra money in your super account if you make voluntary super contributions. For more information about the co-contribution scheme see the article Cashing in on the co-contribution rules (2011/2012). Australia’s three-tiered retirement income system is often described as international best practice. Australia has a safety net for those unable to, or who have chosen not to, save for their retirement. We have a compulsory superannuation system that eventually will take some pressure off the taxpayer-funded Age Pension, and the message is slowly getting through that the easiest way to a financially stress-free retirement is saving more; either in your super or outside of your super.

Major policy gap in Australia’s super system

Australia is better placed than many other countries to support its citizens in retirement but a glaring omission from Australia’s retirement income policy is the complete lack of focus on outcomes – specifically, Australians need a tailored ‘target’ retirement income, and in turn a target lump sum to be saving towards, and a product or other type of mechanism that can deliver Australians a regular income in retirement. The only healthy private pension ‘market’ in Australia exists in the self-managed super fund (SMSF) world. The private sector (read all super funds and financial organisations) have dropped the ball in this area, and the Government and other policy makers don’t appear to have the knowledge, skills or experience to help Australians make the transition from working life to retired life in a financially fit state. The country is relying on financial advisers to deliver this outcome and 80% of these advisers are paid by selling products (via commissions) rather than by providing financial advice, although the world of commissions will change from July 2012 when a prospective ban on upfront and trailing commissions on all retail investment products takes effect. Apart from the ongoing issue of commission-based advice, I believe there are four main reasons for this glaring lack of strategic policy (and implementation) in such an important area:

• Nearly all senior public servants and parliamentarians are members of a defined benefit super scheme (guaranteed income stream for life) and they personally don’t have to worry about funding their own retirement via a pension product, a SMSF, or via non-super investments. In turn, the issue of running out of retirement savings only becomes an issue for politicians and policy-makers if it means more Australians end up claiming the Age Pension.
• For the past 20 years or so, Australian super funds have only been focused on securing market share (read attracting more members) and trumpeting investment returns and why they’re better than the other super funds. Until recently, virtually no super funds have seriously thought about how fund members will convert retirement savings into a primary or secondary source of income when they finish work. Pension products have been an afterthought, and continue to be an afterthought, although the recently introduced account-based pension (introduced in 2007) is a reasonably flexible product, which many super funds now offer to members, but few funds help members through the maze of combining super payments with Age Pension entitlements.
• The pathological hatred of SMSFs by some sectors of the superannuation industry has blinded those sectors as to what attracts individuals to SMSFs. The SMSF sector has the most sophisticated pension offering in the market because each SMSF pension is completely tailored to the uniqRetirement planning in six stepsue needs of the individual fund member.
• The super industry is full of very talented specialists but very few industry players have a grasp on the total general picture for super fund members – investment, tax, Age Pension, longevity, estate planning, risk management and income generation techniques. The most significant flaw in the composition of the superannuation industry is that very few individuals are investors (fund managers are traders not investors) and as a consequence, the super industry doesn’t appreciate the issues facing retirees when trying to manage investments and deliver an income when they stop working.

This skill-based and experiential flaw within the super industry has become more obvious in the aftermath of the GFC. Since the GFC, there has been a renewed interest in creating a retirement product that offers a guaranteed income for the life of the investor/retiree. Historically, this product is known as an annuity but due to the cost of such products they have experienced limited take-up. Financial organisations however are now developing more flexible annuity-style products. I explain annuities in the article Peace of mind, at a cost: 10 things to know about annuities. Annuities have a role but such products are not the solution because we need to tackle the problem from the start rather than from the end of the process. The biggest challenge for the government and for Australia’s future financial health is to encourage Aussies to bite the bullet and have a go at some retirement planning many years before they retire. For articles and tips on how you can create your retirement lifestyle, check out the ‘how much super is enough’ link on the right-hand side of this website, or click on the articles below:

• Retirement planning in six steps
• A comfortable retirement: How much super is enough?
• Setting a retirement target: Living on more than $55,000
• A case study: I’m 53. Is it too late to save for my retirement?

Related posts:

1. A case study: I’m 53. Is it too late to save for my retirement?
2. Setting a retirement target: Living on more than $55,000
3. Accessing super early: Permanent departure from Australia (6 Q&As)

Age Pension rates

Source: Centrelink and FaHCSIA website (www.fahcsia.gov.au)

Age Pension basic rates – transitional rules

Due to a tightening of the Age Pension income test from 20 September 2009, the Government introduced a transitional Age Pension rate to protect the entitlements for existing pensioners as at 20 September 2009 (affecting about 30% of Age Pensioners). Without the introduction of a transitional rate, some individuals would have faced a cut in payments. Affected Age Pensioners will remain on the transitional rate (plus allowances) until they are better off under the new rules that came into effect from 20 September 2009.

The new transitional rate is indexed to the Consumer Price Index (CPI) increases in March and September. According to Centrelink and FaHCSIA (Department of Families, Housing, Community Services and Indigenous Affairs), the notional maximum pension for transitional rate pensioners from 20 September 2011 is $667.20 per fortnight for a single pensioner and $1,077.60 per fortnight combined for pensioner couples. This rate excludes Rent Assistance.

Note: If you’re on the transitional Age Pension rate, you will be assessed under the old and new rules, until Centrelink assesses that you will be better off under the new rules. Once Centrelink determines that you’re better off under the new rules, you will then be permanently subject to the new rules. According to one of our readers, his research indicates that most individuals on the transitional Age Pension rate will have reverted to the regular rates by September 2010.

Source: The information contained in this table was sourced from this link.

Many of the rates and thresholds that are linked to the Age Pension were also adjusted from 20 September 2011. Click on this link to find the latest indexed rates (effective from 20 September 2011) for the following rates and thresholds:

• Age Pension income test (also see SuperGuide article Age Pension: Income test thresholds increases up to 3 times a year)
• Age Pension assets test (also see SuperGuide article Age Pension: Assets test thresholds increases up to 3 times a year)
• Pension Bonus Scheme
• Allowances
• Rent assistance

Related posts:

1. Age Pension: September 2009 rates and thresholds now available
2. Age Pension: Assets test thresholds increase up to 3 times a year
3. Age Pension: I have moved states. Do I get the same amount of pension regardless of where I live?

The May 2011 announcement that allowed retirees to reduce minimum super pension payments by 25% (rather than the previous 50%) for the 2011/2012 year is not sufficient relief considering the recent falls on the international and Australian sharemarkets.

In June 2011, Assistant Treasurer, Bill Shorten issued a statement confirming the 25% pension payment relief, but in doing so, strengthened the case for reinstating the 50% relief that was permitted in previous financial years. Minister Shorten stated:

“Many self-funded retirees with account-based pensions incurred significant capital losses on their portfolios due to the effects of the global financial crisis (GFC). The provision of drawdown relief for the past three years has reduced the need for account-based pension holders to sell assets at a loss in order to meet the minimum payment requirement. This new relief will assist around 120,000 self-funded retirees to recoup capital losses as markets recover.

“The more limited drawdown relief for 2011-12 recognises the rise in equity markets that has occurred since the GFC. The minimum payment amounts will revert to their normal levels from 2012-13.” [end of quote]

Unfortunately, the ‘rise in equity markets since the GFC’ has been severely curtailed in recent weeks, and retirees are now grappling with a continuing depressed, and at times falling, sharemarket.

I believe the gradual reversing of the temporary relief (from half of the minimum pension payment to 75% of the usual minimum pension payment) is way too soon for most retirees. Many Australians are still trying to rebuild account balances decimated during the Global Financial Crisis, and buffetted by the still volatile investment markets of the past few months.

By making this small but significant change to the pension relief rules, the politicians can dramatically improve the future financial health of Australian retirees, with minimal impact on Australia’s budgetary bottom line.

For background information to the minimum pension payment relief in previous years see end of this article. For the latest minimum pension payment requirements see SuperGuide article, What a relief! Minimum pension payments reduced by 25% for 2011/2012 year.

Returning to work?

Although offering 25% temporary relief is better than nothing, for many retirees the 25% relief won’t be enough and they may still face the prospect of selling assets in a falling market to finance annual income streams, or to maintain their existing standard of living. With the latest bout of sharemarketitis, some retirees may be looking at ways to supplement retirement savings.

If you’re facing a severe cash crisis, then you could consider returning to the workforce to boost your super savings or to supplement your pension income. Many retirees continue to work in some form even when they have started an income stream. A popular question that many retirees ask, is whether they can still contribute to super, notwithstanding they are already drawing an income stream from a super fund.

The answer is ‘yes’ in most cases. If you’re under the age of 65, you can make super contributions without having to satisfy a work test. If you’re aged 65 or over (but under 75), then you must satisfy a work test to be able to contribute to a super fund. The work test is not onerous – you must work 40 hours in a 30-day period during the financial year in which you intend to contribute. If you aged 75 or over you cannot make any super contributions.

Tip: You could also consider whether you’re eligible for a part-Age Pension. Any change in your financial circumstances may mean that you become entitled to the Age Pension for the first time, or, if you already receive some Age Pension, a greater entitlement. Returning to work may also affect your Age Pension entitlements.

Background to minimum pension payment relief

For the benefit of our newer readers, the following points provide the background to the pension payment relief issue:

• The temporary relief provided to Australians drawing down on superannuation pensions for the 2008/09 and 2009/2010 years, was in recognition “that the significant downturn in global financial markets has had a negative effect on retirees’ superannuation capital in account-based pensions” (quoting from Government media release).
• When extending the temporary relief for the 2010/2011 year, the Government published the following comments: “Many self-funded retirees with account-based pensions have suffered significant capital losses on their pension portfolios due to the impacts of the global financial crisis. The Government applauds the efforts of self funded retirees who have saved to fund their own retirement. We understand that the global financial crisis is having an ongoing impact on the portfolios of self-funded retirees. While equity markets have recovered to an extent over the past year, they remain well below the levels reached prior to the onset of the global financial crisis.”

• In the 2011 Federal Budget, the Government announced that the temporary relief for the 2011/2012 year involved reducing the minimum pension payments by 25% of the usual minimum.

Related posts:

1. What a relief! Minimum pension payments halved for 2010/2011 year
2. What a relief! Minimum pension payments reduced by 25% for 2011/2012 and 2012/2013 years
3. No pension relief for early birds