Double minimum withdrawal rates, says super industry

Article published 26 July 2023

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If you have a superannuation pension, every year you have to take out a minimum. It's hated by retirees. Now there are voices calling for doubling the minimum withdrawal rates.

LAST week we published a post about how lax super funds were in helping people to plan spending their savings in retirement. But it seems that not everyone in the superannuation industry is lax.

Or, more likely, everyone in the industry is – but some also see the commercial value of offering a retirement income product or strategy.

Whatever the case may be, The Australian has reported that professional investors (including super funds) were arguing at a forum that the mandatory superannuation drawdown rates should be increased.

Mandatory drawdown rates in super refer to the percentage of opening balances that a retiree must take out per year. The idea of super funds arguing in favour of this does not gel with the idea that it is good for funds to minimise withdrawals by members.

The mandatory drawdown rates have only gone back from half to full this current financial year, after being reduced during the COVID pandemic. They were also halved during the global financial crisis.

Those people who are drawing superannuation pensions tend to favour mandatory withdrawal rates to be as low as possible. Most would probably prefer them to be abolished, so that a retiree could decide for themselves. A CPSA News post which explained how a new rule allowed amounts of withdrawn superannuation money to be returned to the fund without penalty was one of our most-read posts ever.

Retirees under 65 must withdraw at least 4 per cent of their account balance each year. That increases to 5 per cent for retirees aged between 65 to 74. By age 95, that goes up to 14 per cent.

The Australian reports that there “is growing momentum within parts of the financial sector to legislate that retirees take more out of their super accounts each year to avoid ‘underspending’ in retirement and to reduce the amount of concessionally taxed superannuation money that will be passed through to children and grandchildren”.

Those “parts of the financial sector” have also done research into why retirees are reluctant to take more money out of their super than they must. A senior executive at one major company that specialises in retirement products is reported to have said: “The spending that people have in retirement is simply not as good as it could be because people just don’t have the confidence that they’re going to be able to continue to sustain a level of income for a long period”.

“A lot of research has been done to look at how much retirees are actually taking and the [federal Treasury department] retirement income review talks about the fact that people are underspending”.

“The question then becomes: If retirees are unable to accurately gauge how much money they should be drawing from their superannuation account each year, how do we fix this problem that they face due to a lack of confidence?”

So far, so good. But then, he takes a wrong turn.

“Should people be forced to take more money out of super each year in order to force them to open their wallets and spend more?”, he asks.

CPSA reckons that any government raising minimum withdrawal rates would be very game indeed. Halving them? Fine. Abolishing? Even better. Doubling? Dumb move. Government would need to be even gamer to take a ’use it or lose it’ approach to superannuation.

Another major industry player has also weighed in, and is reported as saying: “It could be that future governments remove some of the tax benefits if there is too much being passed on to the next generation which is an unintended purpose of super”.

It’s worrying that those companies in the superannuation fund sector who, no doubt for sound commercial reasons, now want a heavy-handed, change-the-law approach to getting retirees to take more money out of super.

How about showing retirees how they can safely use their super savings to maximise their quality of life while not running out before they die?

CPSA’s advice to these nay-sayers is that if these companies focus on their clients’ needs, not their own, they shall most likely prosper.

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