Account Based Pension Percentages Too High

According to Taxpayers Australia, Trustees of self-managed superannuation funds are being forced to restructure their investment strategies as a result of all-time low interest rates.

According to Taxpayers Australia, account based pension statutory percentages are too high in an environment where deposit interest rates offered by financial institutions are giving SMSF trustees (and other retirees) minimal returns. Taxpayers Australia claims that when in pension mode, the drawdown amount can cause unnecessary restructuring of the SMSF investment strategy to ensure sufficient cash to make these payments.

“Our members are being forced to sell down capital assets such as real property and long-term share portfolios to make drawdowns that they don’t want or need to make”, said Moti Kshirsagar, CEO of Taxpayers Australia Ltd.

In order to maintain complying pension status, superannuants are required to draw down a minimum level of their account balance each year. These minimum levels are aged-based as follows:

  • 75 to 79 years are required to drawdown 6% of their account balance,
  • 80 to 84 years of age are required to drawdown 7%,
  • 85 to 89 years are required to drawdown 9%,
  • those over 90 years of age are required to drawdown 11%,
  • those over 95 years of age are required to drawdown 14%.

“With small returns from less risky investments — that is, cash, term deposits and fixed interest, there isn’t enough income to fund these drawdowns.

“During the global financial crisis, from 2008 to 2011, the government reduced the pension drawdown percentage to half the current day amounts,” said Mr Kshirsagar. “With the official interest rate remaining at an all-time low, the time to act is now!”

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The trend towards cash

According to Multiport, a provider of SMSF and managed account administration, reporting and compliance services, there was an SMSF trend during 2015 away from Australian equities and towards both managed funds and cash.

Multiport’s quarterly SMSF Investment Patterns Survey covers approximately 2,850 funds, a sample of the SMSFs Multiport administers and the investments they hold. The assets of the funds surveyed represent approximately $3 billion.

In the December 2015 quarter, there was a significant move away from the S&P top 10 shares, which now represent 14.5 per cent of total fund assets, compared to 20 per cent in December 2014.

Multiport Head of Technical Services, Philip La Greca said trustees are searching for capital growth and yield outside well-known stocks.

“We’ve seen cash holdings increase over the last quarter following distributions from managed funds. While some of this cash has been re-invested in international equities and fixed interest, there were also a higher number of trustees increasing their cash reserves as a result of market volatility,” Mr La Greca said.

Where do SMSF Trustees invest their funds?

According to the most recent tax office SMSF quarterly report (to the end of December 2015), direct Australian shares, cash and term deposits, and non-residential real property are the three most common asset classes.

As an example, a “typical” SMSF with between $500,000 and $1,000,000 of funds under management has the following average asset allocation:

 Listed trusts 4.13%
Unlisted trusts 6.65%
Insurance policy 0.02%
Other managed investments 4.62%
Cash and term deposits 31.03%
Debt securities 0.87%
Loans 0.43%
Listed shares 29.21%
Unlisted shares 0.69%
Limited recourse borrowing arrangements 4.47%
Non-residential real property 9.69%
Residential real property 5.18%
Collectables and personal use assets 0.08%
Other assets 2.32%
Overseas shares 0.18%
Overseas non-residentialreal property 0.02%
Overseas residential real property 0.05%
Overseas managed investments 0.06%
Other overseas assets 0.30%

Source: ATO SMSF Quarterly Statistics

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