The start of 2020 has seen disruption to our economy resulting in a dramatic decline in the value of share markets across the world. Consequently retirees have seen balances in their account-based pensions reduced.
Markets fluctuations are a normal part of investing, however, these movements are of particular concern to retirees as they rely upon the assets held in their account-based pension assets to supply them with income throughout their retirement. While account-based pensions allow retirees the opportunity to structure their retirement assets in a tax-free environment, an important condition of this concessional structure is that they must to make regular withdrawals in line with the age-based minimum legislated amounts. When markets are weak, withdrawals to fund short term income payments means that retirees are forced to crystallise their losses. Once withdrawn from their account based pension, they then will miss out on the opportunity for them to benefit from improved values in the future when markets recover and resume their long-term growth trend.
On 22 March 2020 in response to this issue, the federal government halved the minimum required pension draw down for retirees. This is similar to the legislative response to the Global Financial Crisis of 2007/8. For retirees not reliant on their pension withdrawals to fund their household expenses, this policy allows retirees to preserve their retirement assets by potentially reducing their realised losses. Reducing withdrawals and keeping growth assets invested, allows the opportunity for retirees to keep their assets invested and benefit from recovery in the medium term as share market conditions return to normal.
In practical terms, we urge retirees to review their household expenses and consider if, in the short term, they can afford to reduce their pension income payments. If your budget allows, reducing your pension payments in line with the legislated changes will reduce the amount of retirement assets you need to sell, which should positively impact the amount you have available to fund your retirement in the long term.
See below for some worked examples on how this may affect you.
Milestone Financial Services ABN 68 100 591 508 trading as Milestone Financial is an Authorised Representative of AMP Financial Planning Pty Limited, ABN 89 051 208 327 AFS Licence Number 232706, Level 8, 33 Alfred Street, Sydney NSW 2000, Australia.
This document contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. The examples used are illustrative only and are not an estimate of the investment returns you will receive or fees and costs you will incur.
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