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Super is worsening for self-funded retirees

[Editor's note: this is a comment received to Cuffelinks' 'Have Your Say' section. It has not been edited. It serves as a reminder on the type of correspondence Chris Bowen's office is receiving.]

SMSFs in pension mode are required to drawdown from the Fund each year an increasing minimum amount on a percentage basis. I suggest that the original rationale for that imposition is increasingly less relevant or fair in today’s world. The drawdown regulation was clearly to avoid members accumulating increasingly large asset bases through a tax-exempt superannuation system and consequently understandable. However in light of developments since, it is surely time to reconsider and adjust the drawdown levels and assessment methods. The relevant factors are detailed below and cumulatively adversely affect the longer-term confidence of many SMSF retirees in their Fund’s ability to deliver the sort of security for their older age needs that they had planned for.

1. The numerous Government changes imposed on SMSF superannuation in particular have reduced the levels of attraction for SMSF-type retirement saving - in a stable income accumulation and pension sense. The latest being the relatively recent $1.6 million total asset cap. In an increasingly less stable world achieving responsible income and asset growth return is a much riskier and uncertain process – especially when the asset total is now capped at a lower level for many whose hard work and saving for retirement had planned on a more liberal asset base regime. Although a one-off government pause was applied belatedly during the GFC, there are no guarantees of similar “legislative pauses” for future significant downturns – even though each such adverse investment period significantly reduces the asset base on which retirees rely for earning their anticipated incomes. Importantly, the older they are the less likelihood they have of ever “repairing” that unplanned asset loss.

2. Retirees’ likely life spans are increasingly longer for many. Investment return volatility and downturn risks pose very real concerns for many self-funded retirees about whether they will be able to rely on income levels for which they had planned until death. Actuarial calculations on which SMSF legislation rules are predicated on, use statistics that are some 3 to 5 years in arrears of current experience and in any case questionable when for instance similar UK statistics are compared to Australian. Despite Australia being considered a healthier country than the UK as proved by underlying statistical evidence the UK actuarial tables favour greater longevity and that in turn affects government legislation in respect of superannuation entitlements. That important actuarial discrepancy adversely determines the government’s annual compulsory drawdown percentages against Australian retirees.

3. The announced Labor pronouncements relating to franking and related tax effects would further adversely impact SMSF retirees’ earning and asset base and consequently add further stress on their ability to earn income sufficient for their living span.


Australia’s superannuation regime since inception has become increasingly less certain as the medium to save for retirement with confidence. Government has contributed to that uncertainty through rule/tax changes which disadvantage most self-funded retirees. The effect of #1 through #3 above only heighten self-funded retirees’ fears that what they had saved for will be inadequate for their lifespan due to increasing longevity, government superannuation changes, less stable investment environments, and outdated annual mandatory drawdown regulations that unfairly disadvantage those who chose to be self-reliant and independent of government benefits through hard work and saving. Much about Australia’s superannuation regime remains questionable and in need of drastic review – particularly from a self-funded retiree standpoint. But a critical urgent starting point should be a review of the underlying rules/rationale for the current annually increasing mandatory drawdown levels to reduce the risk to many SMSF retirees of their savings 'bankruptcy' before they die.

Lastly – in the overall Australian superannuation regime context, it is surely reprehensible that politicians and government employees generally continue to enjoy far superior retirement plans and benefits which also often guarantee benefit levels. The historical contexts for such benefits have long since ceased to apply. Most Australians I’m sure would welcome public employee superannuation benefits that more equitably relate to those applying to Australians in general.


Carlo Bongarzoni is Principal of management consultancy firm, Carlo Bongarzoni Associates Pty Ltd.

February 01, 2019

Now that Labor is getting arrogant about the SMSF retirees *go vote elsewhere), then it's time the libs started building a response. Most of the reitrees will have, say, 2 children. If those children see their inheritance going up in smoke, perhaps they will vote against this policy. The devaluation of their parents house, increased capital gains and death duties should be a further incentive. There may even be voting age grandchildren, who will also lose out. By my reckoning, that would make around 2.5 million votes against labor. Could be a game changer!

November 12, 2018

A lot of people my age (early 40s) are watching the changes and wondering. To enjoy life now and retire with $400k + own-home + full couples pension, or to diligently save $800k + own-home to be equally better off.

Unsure of the whether $800k is actuarially correct, but the point is, there’s a whole cohort of people of average means (probably not this reader-base), but with the ability to become self-sufficient with great struggle, who are re-considering whether that’s prudent let alone worth the lifestyle sacrifices.

October 30, 2018

And was it Benjamin Disraeli who said "democracy will last about 200 years. It will take that long for voters to realise they can vote themselves largesse."

October 26, 2018

This article raised an issue that I can't find an answer to.
Does the $1.6 million transfer balance cap only apply to SMSFs?
I would love to get a response to this as it has implications that could influence my future super strategy.

Graham Hand
October 27, 2018

Hi Stefy, the Transfer Balance Cap does not only apply to SMSFs. Cheers, Graham

John De Ravin
October 26, 2018

Carlo I accept your point about the uncertainty in relation to the government rules in relation to means testing and the superannuation environment. But it does not follow, in my opinion, that we should contest the reasonable intention of government that people should use their tax-free superannuation assets to support their retirement income needs, rather than pass on unduly large balances to their beneficiaries.

A key point is that the minimum statutory ABP drawdown rates are reasonable, in my opinion. I'm an actuary and I have reverse engineered the present statutory minimum drawdown rates and found that they are consistent with the value of term life annuities calculated at 2.5% real interest, and for a term equal to the 95th survival percentile (from the Australian Life Tables 2010-12) for the current age of the retiree, averaged across the two genders and across the relevant quinquennial or decennial age bands. I haven't confirmed that this WAS the basis used by the Government Actuary, but if it wasn't, the basis that was actually used must produce results that are extremely close to the basis I described.

And to be honest, that basis seems to me to be eminently reasonable. Surely someone with an appropriate asset allocation for a long-term investment, in a zero tax environment, can expect to earn 2.5% real interest or more over the long term. And from a longevity perspective, the existing minimum drawdown rates appear to target the 95th survival percentile, which again seems very reasonable (though if allowance were made for future mortality improvements, the 95th percentile figure would probably reduce somewhat).

Tony Reardon
October 25, 2018

While I tend to agree with Carlos in much of what he says, it is perhaps interesting to step back and discuss the interaction of taxation and the minimum pension provisions, because favourable taxation is, essentially, the whole point of superannuation. Australia has a fairly strange system of superannuation taxation with 15% on contributions, 15% on earnings in accumulation, zero on earnings in pension mode and zero on pension payments. Most countries tend to weight their taxation towards the individuals when they receive pension payments.

The earnings of money in accumulation mode in superannuation are taxed at 15% (capital gains at 10% when held for over 12 moths) and there are no requirements to take any monies out from accumulation accounts. Moneys taken from either pension or accumulation accounts, once a condition of release is met, are not counted as part of the income in the hands of the recipient and are thus tax free. This applies to the whole amount you have in super, withdrawals are all tax free.

You can essentially have as much money as you have been able to contribute sitting in the fairly lightly taxed accumulation account for ever plus the $1.6 million (plus retained earnings) in the pension account taxed at zero but subject to the minimum pension requirements. If the minimum pension is more than you need or want (if you need all of it, then the minimum is not really a restriction), you have the option of transferring some back to accumulation and paying 15% tax on the earnings of this component or investing it outside superannuation and paying your marginal tax rate on those earnings. If your fund earns the long term average of 7.2%, it is not until you are 85 years old that you have to take more than the earnings out as pension. If you have enough in super whereby the minimum pension is more than you need, I find it difficult to see when this might be a problem.

Carlos raises the issue of withdrawals during share market downturns which might prove problematic. We are all now in defined contribution schemes and thus exposed to the markets by definition and an asset allocation with a strong fixed income component as one gets older is really the only sensible strategy. Perhaps if one held one or two year's pensions in cash, the pain of selling to withdraw in a downturn would be avoided.

As a self-funded retiree, I don't know of a more generous taxation treatment of private pensions anywhere in the world. (Of course compared to those who are entitled to an indexed linked, defined benefit scheme related to final salary from the government, this generosity pales into insignificance.)

October 25, 2018

Superannuation has become an unsafe environment for retirement savings with governments of all persuasions unable to keep their hands off the capital and income of these funds. Perhaps if politicians and public sector bureaucrats were forced to live within the same environment we may see some positivity regarding our ability to save reliably and responsibly for our old age. And pink pigs might fly! The politics of envy, particularly from the Labor party, will always take from those who try to be self sufficient, and distribute to the leaners. As I read somewhere recently "Australia is a country where there are now more people who vote for a living than work for a living" .


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