In July, the government released a consultation paper on the long-awaited retirement income covenant. The aim of the new measure is to improve the retirement outcomes of Australian retirees by requiring the custodians of their savings, superannuation funds, to develop coherent retirement income strategies for their members.
In a recent update, Accurium general manager Doug McBirnie said that contrary to concerns around potential negative impacts for retirees, the implementation of the retirement income covenant could instead be a positive measure for SMSFs.
“Some commentators have suggested that applying the covenant to SMSFs is inappropriate and simply adds red tape,” Mr McBirnie said.
“They argue that the retirement income strategy is likely to become another template document to add to the list for SMSF trustees to sign, which adds little value. I disagree. Done right, the covenant has the potential to improve the retirement outcomes for many SMSF retirees.”
Mr McBirnie noted the government is concerned about retirees not spending their tax concessional superannuation over the course of their retirement. ATO statistics show that typical SMSF balances for 65- to 69-year-olds are very similar to those of 75- to 84-year-olds.
“This suggests that many SMSF retirees are living off the income generated by their retirement savings rather than consuming capital. Now that’s fine (with me anyway) if those retirees are happy with their level of income and would prefer to leave their superannuation savings to the next generation,” he noted.
“However, survey after survey has also shown that the reason many retirees don’t spend their savings isn’t because they’ve got more than they need, but because they are afraid of running out. For example, recent research found that most older Australians (53 per cent) are worried about outliving their savings.”
The proposed retirement income covenant will also require SMSF trustees to develop a retirement income strategy. Mr McBirnie said this considers a variety of things such as members’ finances at a household level (e.g. for a couple), whether they own their own home and applicable taxes.
It also considers eligibility for the age pension, not just now, but throughout retirement, flexibility to meet unexpected costs, and the key risks faced by retirees, such as longevity, inflation and investment risks.
“This will require detailed cash flow planning, calculations and projections that allow for uncertain lifespans,” Mr McBirnie continued.
“Accountants and advisers will be able to use their expertise to help SMSF trustees to develop sustainable retirement spending plans. More SMSF trustees may feel compelled to seek out that advice. New tools are likely to be developed to help SMSF trustees do this for themselves.
“My view is that this will help many SMSF trustees develop better plans to meet their goals in retirement, whatever those goals might be.
“Maybe some of those retirees who would otherwise be too nervous to spend their savings can be given comfort that, with the right plan in place, they can afford to enjoy their retirement a little more. That sounds like a good outcome to me.”
More unnecessary red tape & I expect the fund auditor will have to sign off on this covenant.
Advisers ,Trustees/ members are always engaged in addressing Retirement Objectives, that is their business/ obligations and wishes as the case may be of the respective participants. Over recent years, well structured portfolios have been able to produce investment returns, which have exceeded in many instances, the drawdown requirements. expressed as a percentage of capital. This does not mean however that retirees are scared to spend their money for fear of ‘running out’ or indeed, they are hoarding it for the benefit of their children. .
The assumptions made in the Retirement Income Review and Treasury Retirement Income Covenant Paper can only be described as disingenuous, in the least, to promote the belief that the retention of assets, per se, means superannuation benefits and as a result we should make sure that on their death, nothing will be left.
That the real agenda has not been identified suggests either lack of knowledge or an avalanche of naivete.
The retained asset issue, which, after all, is the ‘sine qua non’ of the justification, actually includes homes skyrocketing in value, investment properties, share portfolios and what retirees might have inherited themselves.
So suddenly we go into the shop and say we want one of those Retirement Income Covenants, you know those ones which will give us more money to live on that what we do now and it will last for the rest of our lives because we don’t know how to look after ourselves well enough and Treasury is really concerned about that. .
Is it not interesting, that the proponents don’t either have the courage to say out loud or knowledge to understand, that it involves the ‘pooling of members assets and the forfeiture of what remains on the members death.
What an absurd proposition for an SMSF
This is really a nonsense and should be rejected.
Interestingly CPA Australia and Chartered Accountants ANZ , believe that “the creation of the retirement income covenant for superannuation funds at this time is unnecessary”.
Would you trust an Australian insurance company to give you a decent annuity which rose with real inflation, not the fiddled CPI?
People will look at shifting SMSFs offshore the way they keep on raising the costs. The total tax and admin costs are becoming comparable – and the Family Court can’t necessarily split offshore assets.3
Rubbish. I am 73. You live off income not capital. I want a rising dividend stream in retirement. The Victorians understood business better than people today.
Remove the pension minimum. If people want to save it for the next generation, let them. The next generation will spend it anyway, just what the government wants.
What a load of nonsense; the minimum pension percentages (designed by Treasury) were predicated on capital being consumed. if the percentages are too low – then increase them – after all its your (government) legislation – we the SMSF trustees didn’t design it.
It seems that trustees will be expected to consider “eligibility for the age pension, not just now, but throughout retirement, flexibility to meet unexpected costs, and the key risks faced by retirees, such as longevity, inflation and investment risks.”
Government with all of their resources can’t predict this stuff – another reason for not putting all of ones assets in an SMSF.
The intrusion of government and its agencies into this sector is breathtaking and justified solely on the basis of a generous taxation concession which is also government legislation – we didn’t design it.
Preciseky