Despite continuing concerns about a possible conflict with North Korea and the ability of Australia's leading bank shares to maintain profitability under increased regulatory pressure, our sharemarket has followed the US and other world markets in rising strongly. This is boosting superannuation account balances and helping to reduce the impact of the new lower employer and personal contributions caps on funds available in retirement.
Existing and future retirees caught by the new $1.6 million limit on tax-free retirement pension accounts will benefit if markets continue to perform well and rise even further. High investment returns will allow minimum annual tax-free pensions to be paid without dipping into capital and reducing the funds available in later years.
By setting an individual absolute cap of $1.6 million that can be invested in tax-free pension accounts, the government has deprived retirees of the opportunity to replenish their pension accounts when markets fall or their annual minimum pension payments exceed fund earnings. Their only hope of ensuring their money does not run out is to continue to achieve positive solid investment returns.
Achieving consistent and solid investment returns has always been the key to funding a comfortable retirement but is now far more important because of the greatly reduced opportunities to fast-track super contributions later in life. The exponential help from compound interest provides its greatest benefit for younger people unable to access their superannuation for an extended period.
The shorter time period involved and requirement to draw down a minimum annual pension that increases quickly with age reduces compound interest benefits for existing retirees but reinvesting as much annual fund income as possible is crucial to funding a lengthy retirement. Where other assets are available to help fund retirement, the best and most tax-effective strategy to make the tax-free pension account last if possible is to withdraw only the minimum mandated annual pension.
Funding additional annual expenses out of the non-pension assets will help preserve and even increase the pension fund assets for future use. The tougher super contribution limits increase the incentives to increase holdings of non-superannuation assets. Having these assets available to use when needed will help restrict withdrawals in retirement from tax-free pension accounts to the minimum mandated annual levels.
Where possible couples can boost their tax-free retirement income by ensuring that both partners make best possible use of the annual superannuation contribution limits. While one individual is restricted to the maximum $1.6 million tax-free retirement pension cap, with superannuation assets equally split, a couple can accumulate up to $3.2 million to fund their retirement. At the minimum annual pension withdrawal rate, at age 65, the combined annual tax-free income for a couple is $160,000.
Daryl Dixon is the executive chairman of Dixon Advisory. email@example.com