How to make the most of low draw-down rates on your account based pension

Retirees with plenty of cash and nowhere to go can breathe a sigh of relief with a last-minute decision to extend special Covid-19 concessions for account based pension investors. More than ever, it requires investors to keep a sharp eye on how the money’s invested and to time investments with when you’re most likely to spend it.

The government announced on May 31 it would extend a special Covid-19 concession that allows investors using account based pensions (ABPs), to reduce the minimum draw-down rate by half. It means, for example, someone aged between 65 and 74 is required to draw-down 2.5 percent of the July 1 account balance instead of the normal 5 per cent amount.

A 66-year-old with exactly $100,000 in their account on July 1, would be required to withdraw 2.5 per cent of that sum, or $2,500 for the year. That can be done over 12 monthly payments or one single payment on June 29, 2022.

At this stage, ABP draw-down rates are expected to return to normal on July 1, 2022.

While initially the concession was introduced to allow investors to ride-out the March 2020 coronavirus share market crash, most funds have roared back to where they were and in some cases, exceeded their pre-pandemic levels.

Some experts believe the decision to extend the reduced draw-down rules is as much about the Coalition’s desire to woo seniors in the lead up to the federal election as it is reflecting the fact that many retirees are unable to spend the money.

In any event, it highlights the need to ensure that the underlying investment mix matches how the money is likely to be used.

Most ABP investors not using a financial adviser will tend to place their funds into pre-mixed investment options such as the ‘balanced’ or ‘conservative’ option.

Under the ABP rules, the fund must make a minimum payment each year although most will select a regular payment, typically monthly.

When the regular payment is due, the ABP fund effectively cashes in the required amount to meet the payment.

To raise the actual cash, the fund manager sells the underlying assets to raise the funds and herein lies the problem.

Let’s say you have invested in the ‘conservative’ or ‘stable’ option.

While the overall approach is conservative, anywhere from 30 to 40 percent of the money will be invested in shares.

If on the day your payment is due the market slumps, the fund manager will be selling shares to raise the cash by selling good quality shares at a possible loss.

You’ve effectively forced the super fund manager to crystallise the loss.

The trick is to match the timeline of the payments to an appropriate investment option, having regard to the underlying risk.

In other words, you want to reduce the possibility of your money going down when you need it.

For example, if you knew you were buying a $30,000 car at the end of the year, the safest and most appropriate investment option is cash.

Given the probability of returns and the chances of a negative return over five years, it is reasonable to set aside the money for the next new car due in five years, into something more appropriate for that timeline. That might mean investing in growth assets like blue-chip shares.

The same philosophy can apply to your ABP.

Given that we know that payments must be made each year, the only risk-free investment option is going to be boring old cash.

Indeed, ideally, you’ll be holding one or two years’ worth of payments in cash and the regular monthly repayments come from that option.

The other longer term funds can be invested in whatever option you feel comfortable with.

The next trick is to keep an eye on things.

On a regular basis look in to see what your fund is doing.

If your selected growth option has surged ahead since you last looked, there’s nothing to stop you skimming off the profits and replenishing the cash pool.

Experts call it re-balancing or re-weighting and it needs manual input for it to occur.

A good financial planner will be doing that for you at the appropriate time or you can do it yourself.

For more on must-know information on superannuation, head here.

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IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.