The changing landscape of retirement income

In the last few years the rules around superannuation have changed, affecting both those who have already retired and those who are approaching retirement.

The changing rules have combined with the pandemic to create a different setting for retirement than what many retirees may have expected.

Knowing what changes have been made and how COVID-19 relates to super is key to understanding your current financial situation and how to make the most of your savings.

The main rule changes have been:

◆ The minimum age for making a one-off contribution to your super from the sale of your home (the downsizer contribution), of up to $300,000 per person or $600,000 per couple, has been reduced from 60 years to 55 years

◆ The asset test exemption, for sale proceeds from your principal home that you intend to use for your new principal home, has been extended from 12 months to 24 months

◆ Before July 2022, people aged 67 to 74 could only make voluntary contributions to their super if they worked at least 40 hours in a 30-day period during the financial year. As of July 2022, this work test no longer applies to personal contributions that you won’t claim as a tax deduction

◆ The minimum rates at which retirees could draw down on their pension was halved to help those who wanted to conserve capital during the pandemic.

The rates, which vary according to your age, will return to their regular levels on 1 July 2023

Head of Retirement at Aware Super, Jacki Ellis, says these changes will affect retirees and people approaching retirement in a wide variety of ways.

“What this means to your retirement outcomes will depend on your individual circumstances,” she says.

“The best thing you can do to understand how your income payment will change and its implications for you is talk to your super fund.”

Lowering the age for downsizer contributions, for example, means more people will be able to significantly boost their super as they approach retirement.

Aware Super’s modelling suggests a person who makes a $300,000 downsizer contribution at 55 could enjoy about $13,000 extra income every year in retirement.

With the work test removed, more people over 67 will also be able to make voluntary contributions to super from other income sources, to make their savings last longer.

On the other side of the rules, the reinstatement of higher minimum super drawdown rates for retirees will mean those affected need to reassess their budgeting.

The impact of the COVID-19 pandemic on financial situations around the world, causing share markets to fall substantially, and the current period of inflation are also making a difference to retirees and retirement planning.

Ms Ellis says when the share market fell in early 2020 there was a spike in people switching their super investment options to reduce risk, but that when the market bounced back many did not take advantage of the market recovery by switching back to shares.

“It’s a salient reminder about the need to take a long-term approach to your super and, if your circumstances haven’t changed, avoid making knee-jerk reactions to volatile market conditions,” advises Ms Ellis.

Aware Super members that took advantage of the free advice provided by the fund on the most appropriate way to invest their super were much less likely than their peers to change their investment approach, and Ms Ellis says this worked.

“These members, through discussions with their financial advisors, understood their circumstances, had a plan and were able to look through the media noise and remain focused on their longterm goals,” she says.

“Those in retirement had set themselves up to have a steady retirement income despite uncertainty in the market.

“Perhaps the greatest benefit that advice like this provides is having the confidence to maintain your lifestyle and enjoy your best possible retirement.”

With the world now bouncing back from the pandemic, inflation has become a huge concern for retirees. According to the Australian Financial Security Authority’s Retirement Standards, the amount of money needed for a comfortable retirement jumped about 6.5 percent in the year to September 2022.

Ms Ellis says this figure is linked to a worrying trend in the price of necessities.

“What’s particularly concerning is prices for non-discretionary items –such as health expenses, food and fuel – have climbed at a faster rate than prices for discretionary goods,” she says.

Retirees can take some comfort in the fact that the Age Pension increases with inflation, as a safety net, and that super funds design their diversified investment options for returns that are greater than inflation over the medium to long term.