From minimum pension drawdown…
Does your minimum pension drawdown give rise to surplus cashflow?
Have you thought about investing surplus cashflow arising from your pension drawdown?
Whilst investing surplus cashflow is most typically a dilemma for self-funding retirees it can also be one for others. Self-funded retirees must draw the statutory to preserve their tax status. Where their pension accounts provide benefits in excess of their lifestyle needs the dilemma is challenging. They often seek advice about how best to use those funds effectively (rather than frivolously).
There is a popular strategy for investing surplus cashflow that has been well received. This strategy works for pensioner clients whether they are using either –
- a ‘public-offering’ (retail) provider, or
- they have a self-managed superannuation fund.
Why do I have to draw more pension than I need to live on? (How does the surplus cashflow arise?)
The Superannuation Industry Supervision legislation requires that a primary purposes for a superannuation account is to provide retirement income. Taxation legislation exempts superannuation accounts that are ‘in pension phase’, from tax on their earnings.
This advantaged tax treatment comes with a requirement that a prescribed minimum amount be drawn down in a financial year. The schedule is graduated so that as the account-owner ages, the percentage to be drawn by them increases.
The minimum percentage is applied to the account balance at the commencement of the financial year. The resultant pension drawdown may exceed the lifestyle budget of the careful pensioner. Consequentially, these austere pensioners accumulate surplus cashflow about which to make some decisions.
The surplus cashflow can be utilised in a number of ways, but not all of them will be beneficial to the retiree in wealth management terms. The (ultimate) estate beneficiaries may not receive all that they could.
How are you dealing with your surplus cashflow?
If you are in this position, is your surplus being utilised to –
- accumulate collectibles that you like (but which may not be valued so highly by your beneficiaries or the market into which they are ultimately sold)?
- enhance the lifestyle of your family or dependants (and missing the opportunity to teach them financial discipline)? Remembering the gifting rules and how they affect any Centrelink benefits you may be entitled to!
- grow an investment portfolio that is causing you to continue as a taxpayer for longer than is necessary (or at a higher rate than is really necessary)?
You might be able to suggest some other uses that your surplus is being put to, but that you would prefer to see accumulating in a more effective way for yourself and for your beneficiaries……
How are pensioners investing surplus cashflow from their minimum pension benefits?
One strategy for dealing with such a surplus is to use investment bonds to provide for beneficiaries (who may or may not currently be provided for in your estate planning documentation), nominating them as beneficiaries in the event of –
- your death; or
- their attainment of a nominated age/ or at a nominated date1 that suits your purposes.
What are Investment Bonds: and are there any pitfalls to consider?
Apart from the investment risks that are detailed in the Product Disclosure Statement for investment bonds on issue by the providers, there is also the need to consider the structure of the estate plan that you may have in place.
We strongly recommend that any intention to proceed with an investment in these bonds, be accompanied by discussion with your estate planning adviser and/ or your financial planner so as to minimise the risk of estate distribution ‘imbalance’ and/ or challenge by disenfranchised potential beneficiaries.
Continuum Financial Planners Pty Ltd is available to explain further…
The experienced wealth management advisers at Continuum Financial Planners Pty Ltd have worked with investment bonds in a number of strategies – including the one mentioned above ( – and for endowment planning; and for education funding). We are available: ‘to listen (to your circumstances), to understand (your financial planning need); and to provide strategies (to help you in your planning)’. To arrange a meeting with one of our advisers, call our office (on 07-34213456); or use the website Contact Us facility – and learn how we can be of service to you with personalised, professional wealth management advice.
