How much superannuation do you really need?

The government has proclaimed $1.6m is enough to provide sufficient income in retirement. Is it right?

The government has proclaimed that $1.6 million is enough to provide sufficient income in retirement.

Is it right? This is a good question but before we can answer it, we need to consider some numbers.

One of the good policies in the 2006 Better Super regime introduced by the Howard/Costello government was the removal of Reasonable Benefit Limits or RBLs. Back then we had two RBLs — a lump sum and pension RBLs.

Each July 1 these RBLs were indexed by movements in average weekly earnings. The 2006-07 lump sum RBL was about $680,000 and the pension RBL was $1.35m. If these had been indexed to the 2015-16 financial year then they would have had been worth about $930,000 and $1.87m.

To get access to the pension RBL you had to use at least 50 per cent of your super money to purchase a pension or annuity that had particular characteristics such as minimum indexation of pension payments and, most importantly, an inability to take any lump sum withdrawals from these pensions. I won’t explain how the system worked, but in practice, when most people wanted to access their pension RBL with some of these pension products they had to put somewhere between 60 and 80 per cent of their total superannuation moneys into these restrictive products. As an added incentive, these products also had some or all of the money placed into them exempt from Centrelink’s age pension asset test.

Pensions that allow lump sum withdrawals — sometimes called allocated pensions or account-based pensions — didn’t satisfy these pension RBL rules and have always been counted under Centrelink’s assets test. As a result, if more than 50 per cent of your super money was used to purchase the type of pension products available today, it would have been assessed against your lump sum RBL.

So on this basis one could argue that the Turnbull/Morrison super ideas are more generous, because you can place up to $1.6m into an account-based pension and still access lump sums.

But the question remains: is this $1.6m enough? Well, if you’re aged at least 65 then under the pension rules, you have to pay yourself a pension of at least $80,000 over a full financial year.

Now if you’re concerned about losing capital and you want to invest your pension money into term deposits, then at present you’d be lucky to get a 3 per cent interest rate for a 12-month TD, or $48,000 income.

Let’s suppose your pension costs you a very low 1 per cent per annum to run (a more realistic fee would be more than 2 per cent each year); then in total your pension has to pay an additional 3 per cent income on top of what it earned from the TD. Where does it get this from? Your only option is to take this money out of your pension’s account balance. After doing this you would have a pension balance of $1.552m. This would earn less income next year and you would have to use more capital to make up the difference.

On the other hand, suppose you invested your money in the ASX 200. At the end of June this year, the yield for the previous 12 months had been 6.1 per cent if we assume at least 75 per cent of the dividend income has franking credits attached and your super fund pays no tax on your pension moneys. The problem with shares is that while the dividends paid are quite stable from year to year, the value of the assets is highly variable and it is this aspect which scares the daylights out of some people.

The maximum single age pension including pension and energy supplements is currently $22,720 per annum, and the maximum couple age pension is $34,250. As we already noted, you can earn $48,000 from your $1.6m invested in 12-month term deposits. A lot of people would conclude this additional $14,000 income for a couple requires too much effort over a lifetime.

Tony Negline is author of The Essential SMSF Guide 2016-17 published by Thomson Reuters.