Business News

Retirement income rethink required

Financial planners need to reassess the way they manage retirement incomes as restrictive, product-focused thinking is creating risks for clients.

Crystal Wealth Partners’ Tim Wedd said many advisers still considered their clients’ retirement incomes only from the point of view of cash flows out of account-based pension products, largely ignoring other assets.

“You need to have more flexibility in how you look at [retirement incomes] and the structures and the business model you use to service that market,” Wedd advised delegates at the 2013 Small Independent Superannuation Fund SMSF Forum held recently in Melbourne.

Some clients are required to draw more from their pensions than they need to fund their lifestyles, particularly as minimum drawdown amounts have increased to 4 per cent a year of the fund’s balance.

Wedd said it was important to capture and manage surplus income for clients who were no longer able to make contributions to superannuation, such as people aged over 65 who failed the work test.

“If it’s not managed, there’s a high probability that it gets spent or frittered away,” he said.

Before the global financial crisis, investors had grown accustomed to high long-term returns for their super funds. But real gross domestic product growth per person is expected to be lower over the next 40 years than it has been over the past decades. This may make it difficult to generate sufficient investment returns in the pension fund to support an adequate retirement income over the long term, particularly as clients draw funds out of the pension environment.

Additionally, longevity risk – the chance a client will outlive their retirement savings – is increasing as life expectancy rises.

Wedd suggested advisers could use surplus pension drawdown amounts to establish a reserve account outside of superannuation, which could be used to supplement retirement incomes as the pension balance declined or to save wealth for future generations.

“[Planners] who have been working with self-managed funds for a while with an aging client base might have started to think about it, but it depends on their solutions toolbox,” he said.

Planning businesses that managed super funds separately from other investments might find it difficult to administer non-super accounts in addition to the client’s pension, he said.

Planners would need systems that were transparent and cost effective, provided up-to-date information about investments, and encompassed super and non-super planning. Managed accounts might provide the solution in some businesses, Wedd said.

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