Down side to strategy for retirees

Even though 2015 has been a volatile and at times worrying year for investors, superannuation funds have been able to generate respectable returns well above current inflation. However, with the likelihood of continuing low interest rates and commodity prices, future prospects are more uncertain, especially now the US will be raising its official interest rates.

This uncertainty adds to the problems facing retirees with an inadequate level of assets for a rapidly increasing expected lifespan. Increased longevity and low interest rates are a potent mix for investors not prepared to risk their assets in retirement.

Traditionally, advisers have encouraged retirees to reduce their risk profile as they age, not least because of the inability to replace assets lost in market falls. This strategy was eminently feasible and affordable when conservative investments yielded high returns and even if asset values declined slightly, the government came to the rescue with a part age pension entitlement. Now
low yields on conservative investments are forcing investors to dip into their capital to fund their lifestyle or accept a reduced standard of living.

The overall situation isn't improved by the appreciation in value and higher related costs of maintenance of the family home for most retirees who are reluctant to incur debt or downsize to help fund living expenses.

The government is complicating future planning further by the decision to double the 2017 pension asset test taper rate to 7.8 per cent of assessable assets subject to the test. Introduction of this change will provide many retirees with an incentive to deplete their financial assets and maintain or even increase their investment in the family home.

The income test taper rate of 50 per cent won't change, meaning that the new asset test implicitly assumes that investors can earn 15.6 per cent annually on their capital. This is, of course, an absurd proposition and clearly illustrates that the underlying objective is to force retirees caught by the assets test to draw down their financial assets to live.

How much the changes about to apply in one year's time will affect the decisions of the 300,000 retirees who will lose part, or all, of their pension remains to be seen.

The major concern is that the changed rules will encourage the early dissipation of past savings because of the difficulty of achieving returns as high as those provided by the age pension.

Far from saving money as proposed, the 2017 changes could very easily add to the number and cost of age pensioners. Encouraging people to increase their risk profile in order to receive higher income and make their savings last longer might well have achieved a better outcome all round.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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