Five common financial mistakes people make just before retirement

Self-managed superannuation trustees are very used to doing everything themselves and some may not be aware that, even with a reasonable-sized superannuation balance, they could still qualify for a small Age Pension payment and the access to cheaper services that comes with that.

Even if receiving a very small Age Pension amount per fortnight, a pension card will get you cheaper vehicle registration, rebates on electricity and gas, and cheaper rate payments.

(Read more about how your superannuation impacts access to the Age Pension.)

People who are ineligible for an Age Pension could still meet eligibility criteria for the Commonwealth Seniors Health Care Card, which means they can access cheaper prescribed medicine and other medical benefits.

However, applying for these benefits through Centrelink may not be an easy task and Michael Houlihan, non-executive director at the SMSF Association, says that often people may start an application but then put it in the too hard basket when it becomes difficult.

“There is nothing at all user friendly about Centrelink,” he says.

But it is important to persevere, as the end result will make a difference to your comfort in retirement.

Learn more about the Age Pension and the Commonwealth Seniors Health Card.

2. Not updating their Will, or having inadequate estate planning

Another thing that should be a priority as you approach retirement is making sure your Will and estate planning are in order.

Many people may have a Will but may not be aware of the role of binding death benefit nominations and how they need to update the trust deeds and governing rules of their SMSFs to allow for binding death benefit nominations to be made.

It is not enough to state in a Will how you wish your superannuation to be distributed once you die, you also need to have valid binding death benefit nominations (BDBN), otherwise it will be up to the remaining SMSF trustees to decide where the money goes.

The court cases of people who did not have a BDBN in SuperGuide article Have you got an exit plan? The importance of estate planning make for a very sombre read.

3. Not preparing their SMSF to pay an account-based pension

Although you may have decided that you want to start paying yourself an account-based pension when you retire, this requires preparation in the lead up to retirement.

For a start, you need to make sure the trust deed allows an account-based pension and update it if it doesn’t. You then need to value the assets starting the pension. Then there is a significant amount of paperwork to be completed and supplied to the trustee, including notification in writing that you want to start an account-based pension.

Exempt current pension income also needs to be calculated, which becomes more complex the more members there are in the SMSF in different stages. An actuarial certificate may be required.

For a more details step-by-step guide to starting a pension read our article here SMSFs: How to start a pension.

4. Not reviewing their investment strategy

Somebody retiring today could live for another 20 years, which means they will need their superannuation to last for at least that long. However, many adopt a conservative approach to investment – shifting away from growth assets like equity and into defensive assets like fixed income and cash – once they retire because they are concerned they are no longer earning an income.

“But what they don’t think about is if I’m 65 my life expectancy is another 20 years out,” Houlihan says.

It is reasonable to be more conservative in your asset allocation than you were prior to retirement but there still needs to be a good allocation to growth assets post retirement.

Given the current low interest rates, which are expected to stay at these levels for some time, rolling over the majority of your superannuation assets into cash may not be a wise investment.

Houlihan also says he spends a lot of time persuading retirees to spend their retirement funds as many want to leave an inheritance for dependents. However, unless you have a very large superannuation balance, it is highly unlikely you will be able to live off the income alone and you will need to get used to a diminishing balance.

5. Not managing their superannuation balance or understanding the transfer balance cap

If your superannuation balance is over $1.6 million, or is getting close to that amount, you need to be very aware of the transfer balance cap and the transfer balance account and how you are going to manage that account.

The transfer balance cap is a cap on the amount that can be used to commence a pension in retirement phase and was only introduced on 1 July 2017. For more details see SuperGuide article Definitive guide to the $1.6 million transfer balance cap. Houlihan is concerned there is a sizeable cohort that are not managing it well in the lead up to retirement.

“You’ve got a whole chunk out there who may not even be aware of the transfer balance cap,” Houlihan says.

Any penalty earnings on your pension balance in excess of the cap will be taxed at 15% for the first breach and 30% for the second and consecutive breaches.

Pre-retirement you need to be aware that once you do retire and commence a pension, a transfer balance account will be created by the ATO in your name. Any time you stop or start a pension in any superannuation fund it must be reported to the ATO.

For a definitive guide to transfer balance account reporting read our article here TBAR – Transfer balance account reporting for SMSFs.