Capital preservation is key

The government has given pensioners an early Christmas gift, writes John Kavanagh.

The government has given pensioners an early Christmas gift, writes John Kavanagh.

Pension drawdown relief, which was to have stopped at the end of the current financial year, will continue in the 2012-13 year.

The Assistant Treasurer, Bill Shorten, announced last week that the current 25 per cent reduction in the compulsory minimum amounts that self-funded retirees must draw from their pension funds would continue for another year.

Superannuation advisers recommend that where retirees are in a position to reduce their drawdowns they should do so. By reducing income from their fund, they are preserving capital for as long as possible.

The reduction in minimum payment amounts will apply to account-based pensions, allocated pensions and market-linked pensions.

One of the rules governing pensions set up with superannuation money is that a minimum payment must be made out of the account each year.

Minimum payment amounts are determined by age. The rule is designed to make sure retirees draw down on their superannuation throughout their retirement years.

For people aged under 65 the minimum drawdown is 4 per cent of the account balance each year for people aged 65 to 74 it is 5 per cent a year and for people aged 75 to 79 it is 6 per cent a year.

For people aged 80 to 84 the minimum drawdown is 7 per cent of the account balance each year for people aged 85 to 89 it is 9 per cent for people aged 90 to 94 it is 11 per cent and for people over age 95 it is 14 per cent.

The government first introduced drawdown relief in the 2008-09 financial year. It recognised that as a result of the severe downturn in global financial markets that year, many self-funded retirees were using substantial amounts of their capital to meet the minimum income requirements and were being forced to crystallise losses.

The minimum payment amounts were reduced by 50 per cent in the 2008-09, 2009-10 and 2010-11 financial years and then by 25 per cent for 2011-12. The 25 per cent reduction will apply in 2012-13.

What this means in practice is that, for example, the 4 per cent minimum drawdown is reduced to 3 per cent.

The head of technical services at MLC, Gemma Dale, says it is a valuable benefit for people who can make use of it. "If retirees are not dependent on the income, reducing the minimum payment from their pension account will help preserve capital longer and it will keep the money in the most tax-effective environment," she says.

Dale says a retiree's decision whether or not to use the drawdown relief will depend, to some extent, on the assets in their fund. If they have a lot of growth assets in their portfolio, they face more risk of capital loss by selling assets to make the minimum payment.

If they are in a capital stable or conservative portfolio, with lots of cash and fixed-interest securities, the issue of capital preservation is less of a concern.

The chairman of the Small Independent Superannuation Funds Association, Michael Lorimer, says the volatility in investment markets in the past few years "has meant that most people with superannuation pensions have had to liquidate assets to meet minimum payment requirements". Those asset sales have come at the wrong time.

"From a capital preservation point of view, retirees should be drawing down the minimum," he says. "If they don't need the income, they should be making use of the relief measure."

Returns from super funds have been under pressure for much of this year.

SuperRatings reports that the median balanced-fund return for the September quarter was a loss of 4.9 per cent.

Over the past three years, funds have just made it into positive territory. The median balanced-fund return for the three years to the end of September was 1.1 per cent.

In those market conditions, capital preservation remains an important planning issue.

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