ATTENTION RETIREES AND IMPENDING RETIREES

Monday, April 06, 2020
ATTENTION RETIREES AND IMPENDING RETIREES

Written by Hudson Adviser Ivan Fletcher

It can be an anxious time watching falling asset values when they are a significant (potentially only) source of retirement income. Whilst it absolutely true that now is not the time to be making radical changes to your portfolio, but that does not mean "Do Nothing". There are several strategies to consider in managing through such turbulent times.

1. BUCKET STRATEGY  

For those that utilise Hudson Superannuation and Pension services, you will likely be familiar with the "Bucket Strategy Approach" whereby up to 3 years of your income needs are specifically proportioned into Short Term defensive assets (cash and fixed interest). It was only a month ago that the focus by most people was on how poor the return was on cash and fixed interest, suddenly 0.5% return (positive) is not so bad.


It is in circumstances such as these that the real value of the Bucket Strategy comes into play.
Whilst share values experience wild volatility, the impact on Short Term investments (Bucket 1) is minimal (as there is minimal to nil share exposure among these investments ). The longer Term bucket (Bucket 3) which is predominantly shares is impacted heavily, but these investments are the long term part of the portfolio and should not be required for at least 6 years to contribute to your income allowing plenty of time for the collective global economy to recover.

Contact your adviser if you would like more information on this strategy.

2. REDUCED LIFESTYLE COSTS

In our new 'isolated' lifestyle we all (not just retirees) have the opportunity to cut back on non-essential expenses (except maybe Netflix and Stan).  It is really forced upon us. It could be a very beneficial exercise to go through your bank accounts for the last 3 to 6 months and identify expenditure that you can no longer incur (travel, dining out, sports and social activities, dinner parties). From there you can then deny your self the corresponding income (example reduce your pension drawings accordingly).

3. REDUCED ACCOUNT BASED (ALLOCATED) PENSION MINIMUMS

The Australian Government has temporarily reduced superannuation minimum drawdown rates for account-based pensions and similar products by 50 percent for the 2019/20 and 2020/21 financial years. The following table illustrates the temporary reduction to the minimum pension drawdowns.

Age

Default minimum drawdown rates

Reduced rates by 50% for the 2019/20 and 2020/21 financial years

Under 65

4%

2%

65-74

5%

2.5%

75-79

6%

3%

80-84

7%

3.5%

85-89

9%

4.5%

90-94

11%

5.5%

95 or more

14%

7%


This flexibility offered by the government supports both Strategies 1 and 2 above and will allow your Short Term defensive assets to last even longer.

Alternative Strategies For  Account Based (Allocated) Pensions


 
a) Minimalist Approach (Reduce to New minimum)

Anyone who is on regular pension payments (fortnightly, monthly or quarterly) will now by default have already received this reduced new minimum,  so therefore you do have the option of ceasing pension payments completely for the rest of this financial year and then commencing next financial year on the reduced minimum (per above). For Fortnightly payments this can commence from 22 April, and for monthly payments from 25 April.  This strategy maybe suitable if you have large liquid holdings outside of super or sufficient alternative income sources (eg Defined Benefit pensions or rental income, part time work, centrelink pension, etc)

An alternative is to half your current drawings if you are on the minimum effective now with the intention of continuing at the new minimum into the new financial year. In this scenario your pension amount will recompute for the first payment in July.

b) Revised Dollar Amount

You could reduce your regular pension payments to a specified lower amount to match your budget. Instead of continuing with the current minimum (eg: 5%), you could nominate a specific and exact Dollar amount to match you revised Budget (Strategy 2) example $1,600 per Fortnight. 

This strategy is suited if your Allocated Pension income is your predominant source of income and you are a strong budgeter. You can fine tune it to your exact needs and when the new financial year starts, your pension amount should not change (as it is no longer based on a percentage based calculation) and provide more time for your longer term investments to recover.

4. CENTRELINK UPDATES

Currently on Full Pension

For anybody who is already on the maximum Age or Disability Pension payment the only change is the government bonuses recently announced and identified in previous Hudson articles.

Currently on Part Pension

Anybody who is on partial Support payments for Age/ Disability Pension and is impacted by the ASSETS TEST (rather than the Income test) may secure an increase in payments to compensate for the loss in asset values. Any increase in Centrelink payments can then be used to further reduce your Allocated Pension drawings (Strategy 3).

For any loss in asset value you could see an increase in your pension payments equivalent of up to 7.8% return depending upon where you sit between the minimum and maximum thresholds.

Eg Couple (who own their own home)

Total Assessable Assets drop from $600,000 to $500,000.
The Centrelink increase maximum would be $100,000 x 7.8% = $7,800 = $150 per FN Each.

Eg Single (who owns his/her own home)

Total Assets drop from $400,000 to $300,000.
The Centrelink increase maximum would be $100,000 x 7.8% = $7,800 = $300 per FN.

Note - Every case will be different and will depend on how close you are to the maximum Asset thresholds and also the application of the Income Test (which may be the predominant Test for some people with significant other sources of income).

Beware of Timing Delays / Differences

  • Centrelink generally seek half yearly updates from Allocated Pension accounts in February and August. However there is usually a delay in this information flowing through to calculations. These updates are just starting to flow through now.
  • This means that any Assets assessment recently performed and updated on your accounts could be on asset values before the large drop in share valuations through the month of March on the back of the Corona virus outbreak. (In other words if you receive a March assessment it is likely based on February Asset values)
  • Likewise if you supply reduced asset values and your pension payment goes down (instead of up), it could be that they received an auto update from your Pension provider around the same time or just after your update. IF this is the case use your mygov login to look up your “Income Statement” and check your asset values (and last date updated) and then provide updated asset values if they are significantly reduced compared to Centrelink records.

What To Do?

You can provide an update on your current asset balances to Centrelink via the mygov website

The reduction in your Asset Test may then result in increased Centrelink payments if you are not already on the maximum pension amount.  Don't expect this to happen overnight and if you hear nothing after several weeks you may need to follow this up with a phone call.

How Often Can I update Centrelink?

The truth is I don’t know the answer to this. The system would likely not cope with a new asset value update every week or so and you would likely draw unwanted attention to yourself.  However doing one update now that your assets have significantly reduced is reasonable, especially given their automated update process has coincidentally just happened around the time of the market peak.

IN SUMMARY

There are several levers you can pull that will assist in managing through the current crisis and the collective combination of these strategies have the potential to provide a significant positive impact on the longevity of your own retirement assets. Whilst it absolutely true that now is not the time to be making radical changes to your portfolio, that does not mean "Do Nothing".

Your Hudson advisers are now working from Home office but otherwise it is business as usual. This is the perfect time to review your personal circumstances.


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