Retirees’ drawdown rate is under new pressure and this time it’s from the big end of town

Currently, retirees under 65 must draw at least 4 per cent of their account balance each year.

After several years of retirees preserving more money in retirement funds with the halving of the superannuation pension minimum drawdown rate, the normal drawdown schedule resumed from July 1.

Retirees under 65 must draw at least 4 per cent of their account balance each year, and it is 5 per cent for retirees aged between 65 to 74. If you reach the ripe old age of 95 you will be required to withdraw 14 per cent of your account each year.

But not everyone thinks this is enough. There is growing momentum within parts of the financial sector to legislate that retirees take more out of their super accounts account each year to avoid “underspending” in retirement and reduce the amount of concessionally taxed superannuation money that will be passed through to children and grandchildren.

In a recent Portfolio Construction Forum gathering called the Finology summit, leading investors came together to discuss how uncertainty can shape human behaviour in retirement.

With volatile investment conditions, high inflation and recession fears, many retirees have reduced their spending and lived more frugal lives to get through these tough times.

Some have deferred overseas trips or renovations at home, while others have changed their spending habits in order to reduce their weekly shopping bill.

To understand why retirees have been scrimping and saving, Allianz Retire Plus head of product Mark Lapedus said at the Finology summit: “The spending that people have in retirement is simply not as good as it could be because people just don’t have the confidence that they’re going to be able to continue to sustain a level of income for a long period.

“A lot of research has been done to look at how much retirees are actually taking and the (federal Treasury department) retirement income review talks about the fact that people are underspending.”

The question then becomes if retirees are unable to accurately gauge how much money they should be drawing from their superannuation account each year, how do we fix this problem that they face due to a lack of confidence?

Should people be forced to take more money out of super each year in order to force them to open their wallets and spend more?

“A previous survey was done to show that most retirees actually just take out the SIS minimum out of their superannuation,” Lapedus said.

“And so the SIS minimum is exactly there as a minimum, but a lot of retirees actually believe that because that’s the amount that the regulators tell them to take, that’s obviously the right amount and therefore you shouldn’t take any more than that.”

Instead of a 4 per cent minimum drawdown below age 65, should this be increased to 6 or 8 per cent?

Should people be forced to take more money out of super each year in order to force them to open their wallets and spend more?

An alternative approach put forward at the summit was a “use it or lose it” approach to superannuation.

Fidelity head of client solutions and retirement Richard Dinham told the summit: “The government minimums really do anchor people’s spending patterns … The government really needs to think about what those minimums should be, and the 4 per cent is probably too low.

“The statistics and the system back up the fact that they (retirees) are underspending and leaving too much at the point of death.

“It could be that future governments remove some of the tax benefits if there is too much being passed on to the next generation which is an unintended purpose of super.”

There is already a 17 per cent tax on the taxable component of superannuation death benefits paid to non-dependent children, but it appears there would be support to increase this in order to encourage retirees to withdraw their retirement nest egg throughout their retirement, rather than gift it to future generations.

The rationale is that the government provides retirees with tax incentives to save money into superannuation while they worked. By doing this, the government hopes that people can be self funded in retirement and not be a strain on the public purse via drawing on Centrelink’s age pension.

Given that someone earning $200,000 per year can save 32 per cent tax by salary sacrificing into superannuation while working, it makes sense that some are calling for retirees to be encouraged to spend their superannuation funds once they enter retirement.

But not everyone will agree that retirees should be taxed more if they have money left in their super account upon death, or that the annual drawdown requirement is increased.

James Gerrard is principal and director of Sydney financial planning firm www.financialadvisor.com.au