The government needs to revisit compulsory distribution rates for smaller super holdings

After 90 minutes of discussions with Brisbane subscribers this week covering an incredibly wide range of business and investment topics, an elderly lady came up to me and asked for help.

She explained that the superannuation pension mode minimum distribution requirements were now pitched at levels that were well above her likely earnings in the absence of high-risk strategies.

Accordingly, her capital was running down. Mindful of my role in getting the government to see some sense in superannuation (albeit a small role and shared with many others) she asked me highlight to the government the unfairness of the current pension compulsory payout requirements.

Younger readers may not realise that once a superannuation fund goes into pension mode and the beneficiary is aged less than 65, it must distribute 4 per cent of the asset value of the fund until the beneficiary turns 65, after which the minimum distribution becomes 5 per cent of the assets.

Once the beneficiary reaches 75 minimum distributions rise to 6 per cent of assets. On reaching 80 it escalates up to 7 per cent and keeps rising.

Once you reach 95 minimum distributions becomes 14 per cent.

It is not unreasonable that we have compulsory distribution requirements because superannuation income in pension mode is currently tax free (there will be a limit to the amount of tax-free income when the new superannuation rules are passed).

However, the over-65 and certainly the over-75 distribution rates are so high that a beneficiary is unlikely to have much to distribute once the person reaches 95.

These distribution rates were set when investment returns and interest rates were much higher and life expectancy was much lower.

Because I am 75, I have been very aware of the unfairness of the distribution requirements but writing about it smacked too much of pushing my own barrow (thanks to a number of events, including the sale of Business Spectator to News Corp, I’m not seeking a change for people in my position).

But the elderly subscriber who approached me in Brisbane is trying not to be a burden on the community (either by funding her own retirement or at least using her superannuation fund savings to minimise her reliance on the government pension).

The current set of rules is throwing her on the public purse much earlier because it was designed by public servants who don’t understand private sector superannuation because they have enormous lifetime indexed pensions.

In simple terms, this elderly subscriber is forced to run down her asset base which generates her income because she can’t earn returns at the five or six per cent rate.

Like so many Australians, she goes to a financial planner who shows her how to manipulate her superannuation pension and overall assets so as to maximise her use of the government pension.

If she shops around she will be charged a reasonable price for the financial planning service but many pensioners are ripped off.

I emphasise again that I am not seeking change for people who are comfortably placed but, in the interests of reducing the long-term pension bill and interests of basic fairness, I urge the government not to force those with relatively small amounts in superannuation to reduce their asset base so they become more and more dependent on the public purse.

Footnote: Tomorrow when, along with my colleagues, I have completed yarning with subscribers in Brisbane, Melbourne and Sydney, I will comment on what I have learned from the face-to-face contact with readers.