26/04/2017

Imagine this scenario: you have worked hard building up your super and are looking forward to spending your retirement years enjoying the fruits of your labour. Being on an account-based pension, you will need to withdraw the minimum requirement every year based on your age and correlating minimum percentage. You are pretty confident that your saving strategies employed throughout your working life will allow you to live comfortably on your super and accommodate for unexpected situations along the way.

However, there is probably just one thing you may have not have factored in: your increased life expectancy.

In the superannuation world, we are often searching for ways to maximise our super interest - to make our money work for us in our later years so that we can sit back and relax. What we are not realizing is that our improved standard of living may be seen as a risk to our super interests. The term “longevity risk” has been bounced around in recent years and this refers to the risk associated with an increased life expectancy of pension holders, ie running out of your pension.

Initially, the minimum compulsory percentage withdrawal of the account balance based on our age seems reasonable: the younger you are, the smaller your percentage amount of your pension account balance you need to withdraw. The lowest, for members aged under 65 at the time the pension commenced, is 4%. This percentage is somewhat arbitrary given that it does not take into account the member’s personal circumstances, ie their lifestyle choices or in fact their genes, which would be contributive indicators of their life expectancy.

Admittedly, it would be difficult to come up with an equation as to how much each pension holder should be required to withdraw as part of their minimum percentage based on their lifestyle choices and certainly, “one size doesn’t fit all”. One thing is for certain, however, and that is the 4% is not a viable percentage point in our current environment.

So maximize your super balance by all means but when the money starts to be withdrawn, consider the need to save or reinvest some of the withdrawn amount just in case you outlive the age the Tax Office has decided you are going to die.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.