There’s no doubt that the COVID-19 pandemic had a significant impact on superannuation funds in Australia. Investment markets have been extremely volatile, which has seen the balance of many super funds either fall or not grow as expected.
Many funds have found themselves with severely reduced income streams to pay super pensions to their members in the retirement phase, including self-managed super funds (SMSFs). Returns from many asset classes have reduced over the past couple of years, especially many share dividends and share prices.
The change to minimum pension withdrawal
One of the Morrison government’s financial responses to the pandemic was to temporarily reduce the minimum annual super pension withdrawal amount. Although this change was made by the federal government as a financial relief measure for super funds (i.e. to reduce income demands), many funds have still struggled to meet even the reduced minimum pension payments that are required by their members.
The table below shows the pre and post-COVID minimum super pension withdrawal amounts. As you can see, the minimum percentages have been halved. This reduction will be in place until the end of the 2022-23 financial year.
|Age||Pre 2019-2020 financial year minimum pension withdrawal||Minimum pension withdrawal (2019/2020 to 2022/2023 financial years)|
|Under 65||4% account balance||2% of account balance|
|65 to 74||5%||2.5%|
|75 to 79||6%||3%|
|80 to 84||7%||3.5%|
|85 to 89||9%||4.5%|
|90 to 94||11%||5.5%|
How SMSF trustees can reduce their income risk
SMSF trustees have a legal obligation to regularly review their investment strategy to ensure that it continues to cater to changing market conditions and the changing needs of members over time. Funds that have members who are either in the retirement/pension phase (or who are approaching it) need to pay particularly close attention to their investment strategies.
Investment market conditions have changed significantly due to the economic impact of COVID-19 and rising interest rates, and these effects are likely to continue to be felt for the short to medium term. Share markets are likely to continue to be volatile, and more secure, fixed interest and/or annuity markets will become more attractive as interest rates rise.
One way to reduce an SMSF’s exposure to risk is to diversify its investments as much as possible. For example, having an appropriate spread of investments to cater for both the income and capital growth needs of their fund members. Diversification both among and within asset classes can help to reduce investment risk. For example, a diverse portfolio of shares reduces a fund’s exposure compared to having only a limited range of share investments.
SMSFs with a member or members in (or near) the pension phase need to be able to generate the income that these members require via liquid investments to make required pension payments. Property can be appropriate for shorter-term SMSF liquidity needs if it generates a very stable, secure rental income, as can an offset account attached to your SMSF loan.
With demand for rentals at an all-time high through the peak of the pandemic, property investments have enjoyed high rent returns. Incorporating property as part of your SMSF investment strategy might be the right move for you.