Question 1: In super pension phase, why is there a minimum annual draw-down requirement instead of letting people withdraw less if they wish? If you don’t need the full draw-down amount in any year you can’t deposit any surplus back into super and it can be difficult to find investments outside super that pay as well.
However regarding investments outside super, Warren Buffett recommends a low-cost index fund. What’s your advice on this area please?
The government has previously stated that it wants super to be drawn down and used to fund retirement, rather than used as an estate-planning strategy, i.e. not spending your super funds then passing it all on to your children or other dependents.
This is the primary reason that annual minimum withdrawals are required from account-based pensions, and the older you are the higher the percentage that applies.
Note that during COVID the government reduced the minimum withdrawals by 50 per cent, however, the normal minimum drawdowns are set to recommence from July 1 as per the below table:
Expect a shake up in the retirement income space going forward.
Up until now all the focus has been on the ‘accumulation’ side of super, but little thought on the de-accumulation side and different types of retirement products that could be appropriate.
The government is introducing an obligation for superannuation trustees to have a retirement income strategy that outlines how they plan to assist their members in retirement, due to commence on July 1.
It is hoped this will also encourage product innovation in the retirement space, give retirees more options and to be able to balance access to funds, longevity concerns and preservation of capital.
In relation to your second question, low-cost index funds are gaining in popularity and are an ideal investment for many investors, and as you have stated, the most famous investor in the world Warren Buffett is a big believer in them.
Most ‘active’ fund managers, that is fund managers that try and pick specific companies to invest in rather than just follow an index, typically underperform the index after fees over long periods.
Vanguard and BlackRock are the two biggest fund managers in the world and offer very competitive index funds, either via a managed fund or an Exchange Traded Fund (ETF).
You then need to decide what index you want to track, i.e. ASX200, Dow Jones, MSCI world index, or even a ‘balanced’ style index fund that tracks various indices.
It’s important to take into account how much ‘risk’ you are willing to take when investing, including your investment time frame and the purpose of the funds you are seeking to invest.
You can speak with a financial adviser who would have access to research reports on different funds and fund managers to help you select an appropriate fund or funds.
Question 2: I’m 59 years old and have recently been retrenched and paid $240K. I have a mortgage of around $1 million for two properties. My super is $560K. Should I pay the $240K towards my mortgage or add to my super. Thanks
After receiving such a large sum of money it’s a good time to take stock of where you are at, your assets and what your long-term plans are.
This includes listing all your available funds, how much you need to live on, and whether you want to go back to work, and if yes, how soon you would obtain a new job.
Answers to the above and analysing your financial and lifestyle goals will then determine the best approach for you.
However, generally speaking, as you are nearly 60 it may be appropriate to contribute the majority of the funds to super.
This is because you will be able to access the funds when you retire and they would be invested in a very tax-friendly environment and be able to be withdrawn tax free after age 60.
If your loan is tax deductible that is another reason not to pay it down and to concentrate on building your super, you can then withdraw funds after retirement to pay down the loan.
This is contingent on that you can adequately service the loan.
If not, you need to ensure you maintain adequate funds at call to make your repayments and to cover emergencies.
What your plans are for the two properties also needs to be taken into account, if you’re planning on holding long term or selling in the near future may affect what you decide to do with the payment.
In the short term you could place the funds in an offset account while you weigh up your plans, and also consider seeking personalised financial advice.
Question 3: I have power of attorney over my parents’ assets, including all financial matters. When they die, can I sell their house outright without waiting for probate? I am the sole inheritor, live a long way away, so want to dispose of things ASAP.
Powers of attorney cease once the person who grants the power of attorney (the donor) passes away; therefore you will not be able to rely on it after that time.
Once your parents die, their will takes over.
This can become complicated depending on who is involved and the assets they have at death.
Having a power of attorney and wills in place is a very good start.
However, to ensure things run as smoothly as possible it might be best to seek legal advice now, and have clear lines of communication between yourself, your parents, their solicitor, the executor of the will and beneficiaries.
Craig Sankey is a licensed financial adviser and head of Technical Services & Advice Enablement at Industry Fund Services
Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.
Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.
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