How to use Moneysmart’s Account-based pension calculator

Welcome to our tutorial on Moneysmart’s Account-based pension calculator. This calculator is useful if you’re considering commencing a pension in the next few years or even right away. It doesn’t take into account any income that you receive from Age Pension, so it’s particularly useful if you’re not Age Pension eligible for any reason. This calculator will simply assume that you withdraw the same dollar amount of income every year from your account-based pension, indexed to inflation to keep up with the cost of living.

Even if you are Age Pension eligible, this calculator can still be useful to compare the costs and returns of different pension products that you’re considering, so that you can see the impact that fees and returns can have on how long your pension may last, and that can help you to choose the product that might be most suitable for you.

To start, you just need to scroll down from the top of the screen and enter some basic details about your situation. Your age, so we’ll just put in someone who’s 65, and let’s say that they’ve already retired from work, so they’re ready to start a pension account.

Here, put in your current super balance. I’ll just use an example of $600,000. And the income that you’re going to withdraw from the pension. Now, this tool pre-populates the minimum that you must withdraw based on your age and the balance that you’ve put into the calculator. You can see here, the minimum, based on what I’ve put in, is $30,000 for the first year. Let’s say we take out a bit more than that, $35,000 from the pension account.

Now, if we scroll down a little further, you can see here we can put in the fees for a pension account. The default figures are based on industry averages, but you can put in the real numbers that apply to the pension product that you’re considering. To do that, you just change from Default to Other. And then you can put in any dollar-based admin fees that are charged and any percentage-based fees that are charged.

Here it says indirect cost ratio, but it doesn’t have to be called that in the product disclosure statement that you’re looking at. Any percentage-based fee that’s deducted out of your account balance can be put into that box and the calculator will take it into account. Even if there’s more than one percentage-based fee, you could add those together and put them in there.

Let’s say the administration fee in this case is $80 a year, and there’s also an administration fee of 0.1% of the account balance. Unfortunately, there’s no way in this tool to put in a cap on that administration fee, and some products do do that. They may charge you 0.1% of your balance, but only for the first $500,000 say, that you have in your account and no fee above that. Unfortunately, this calculator is not sophisticated enough to take that into account.

Then we can move down to the investment return. Again, it’s got a default built in here of a 6.5% return, but you can change that to suit what you expect your investment return to be based on the asset allocation that you will choose for your account-based pension.

Here’s where it can get a little bit tricky. The investment return that you need to put in here is before fees. It says before tax as well here, but account-based pensions in the retirement phase don’t attract any tax on their investment returns in any case, so you don’t need to worry about that.

But this is the return before fee. That’s not the same as what the funds will publish. Super funds all publish their investment returns after fees. You really have two options here. You can estimate what you think the return before fee will be and put in the investment fee in this box, or you can just put in what you think the investment return will be after fees based on perhaps a long history of returns, and you can leave this investment fee as zero. Either way, the calculator will still work.

We’ll put in something that may be quite realistic, let’s say, an investment return of 6.5% per year and an investment fee around 0.6%. That would be a very reasonable fee.

Now, if you continue to scroll down, it just shows you in this calculator a graph of how your balance in your super pension would be expected to decline over the years if you draw that income, receive that investment return, and pay those fees. It gives you an idea that your balance in this scenario is likely to run out around age 89.

You can also change the view here to see it by income instead. You can see what the calculator is doing here is just maintaining the same income, if possible, throughout until you run out of money at 89 and don’t have that much to withdraw. Either way, you can view your results.

You also then can compare an alternative pension. This is what this calculator is particularly useful for. If you click over here, some more boxes will pop up. It assumes you’re going to still draw the same income from this alternative pension that you’re going to compare, although you can change that if you want. So if you’d like to compare what would happen if I withdrew less and what the outcome would be, you can certainly do that here too, rather than comparing a whole different product.

So here again, we can put in the fees for our alternative product. So let’s say again, we’ll put in some other fees. This product has a higher administration fee, perhaps $150 per year, and a higher percentage-based administration fee as well. They charge, let’s make it more, say, 0.4% of your balance. We can put in the same for the investment return, so we can see purely what the impact of fees would be, and that can be quite informative. So I’ll put in the same before tax investment return of 6.5%, and the same investment fee of 0.6%.

Now the results have been updated. You might have seen that little pop-up at the bottom of the screen, but we can’t see the results at the moment. We have to scroll back up to where they’re shown in the calculator. You can see now it’s showing you a comparison between the first pension we put in, this dark blue one, and the second pension, which is the light blue one. The light blue one runs out a year earlier because it has higher fees that we put in. You can also view that instead by balance, if you’d like to see it that way and compare the two. There’s not a big difference because I haven’t put in a large difference in fees, but certainly you can tailor this to any two products that you’re comparing to see what the potential outcome could be.

Let’s look at the other way of doing this. We can match the administration fees of $80 and 0.1%. So now we’re comparing the same product, the same fees, but withdrawing a lower income. So let’s say we withdraw the minimum instead of $30,000 per annum. Again, the calculator will update our results. You can look here to see that that makes quite a big difference. If you withdraw $5,000 less per year from the same product, then your money would last significantly longer, according to this calculator.

Now, we do need to keep in mind that this is a very basic illustration. It’s assuming that you earn exactly the same investment return every year, which in practise is extremely unlikely. Investment returns are quite variable, and that will have a big impact on the reality of how long your income lasts. There are other calculators available that can take into account some of that variability to allow you to do some stress testing and get a more realistic picture of what the possible outcomes are. But this calculator is certainly useful to get a ballpark idea of how withdrawing different levels of income could affect you and how paying different levels of fees with different products could also affect you. That’s where it’s a useful tool to have a look at.

Also, whenever you’re using a calculator, do keep in mind that you need to look at the disclaimers and the assumptions that come along with it. So at the bottom here of ASIC’s page, you can see the disclaimers, which include that this is a model and not a prediction. Again, it mentions what I’ve said that the calculator assumes that everything remains steady and predictable over time, and that’s not something that’s going to happen in reality, but still a useful tool in some circumstances.

Also here is the further assumptions that you can have a look at to see more details. And the last thing I’d like to show you is this Advanced box here. So if you have a financial planner and they’re charging you additional fees on your pension product, you can actually put those in here. You can have either percentage or dollar-based advisor service fees that you can add into the model. You can also change the assumptions for inflation and wage growth. The inflation assumption is by default set at 2.5%, which is the RBA’s long-term target for inflation. If you believe that inflation is going to be persistently high for some time, you might want to change that number. That’s totally up to you.

So that is ASIC’s Moneysmart Account-based pension calculator. I hope that’s helped you to understand how to use it and what it might be useful for so that you can have a play around and model your own situation. Thank you.