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Written by Ivan Fletcher
It can be an anxious time watching falling asset values when they are a significant source of retirement income. Whilst now is NOT the time to be making radical changes to your portfolio structure, it is an opportune time to revisit your cash flow strategies for the new financial year. Below are four areas for your review (not all 4 will be relevant to everyone).
1. REVIEW LIFESTYLE COSTS
The first checkpoint (for everyone) in assessing your cash flow should always be the expense budget. This is especially true this financial year.
When the pandemic first hit in 2020, most people experienced a reduction in lifestyle expenses. Now however, lifestyle budgets are returning to their former levels or higher with inflationary pressures. Take the time to review your expenses. It still remains the biggest impact on the longevity of your funds and the one you have the most influence over.
2. REVIEW DEFINED / FIXED INCOME SOURCES
You may have little flexibility in income sources such as Defined Benefit or overseas pensions or rental income, however by reassessing these incomes you are able to better define what your income shortfall is. For example, if you have identified a budget of $60,000 income p.a. and assessed your fixed income streams (eg, $15,000) you have identified the shortfall of $45,000 to be met from pensions sources (government or personal).
3. UPDATING CENTRELINK – REVIEW GOVERNMENT PENSIONS
If your assessable assets (everything except your home) are less than $900,000 (for a couple) and $600,000 (for a single), you will likely be receiving or qualify for some Centrelink age pension. If you are of pension age and your assets have dipped below these levels, it may be worth your while applying for the Age Pension.
Currently on Full Pension
For anybody who is already on the maximum Age pension (or Disability Pension) payment, you will not experience any changes to your pension payments unless the government announces any further one-off bonus payments as it has on a few occasions since the pandemic began.
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.
For any loss in asset value, you could see an increase in your pension payments equivalent to a 7.8% return depending upon where you sit between the minimum and maximum thresholds.
This is a significant safety net during volatile markets and may require you to take action to receive the benefits.
Example – Based on Assets that have dropped by 10%
Eg Couple (who own their own home)
Total Assessable Assets drop from $800,000 to $720,000.
The maximum potential Centrelink increase = $80,000 x 7.8% = $6,240 = $120 per FN Each.
Eg Single (who owns his/her own home)
Total Assets drop from $400,000 to $360,000.
The maximum potential Centrelink increase = $40,000 x 7.8% = $3,120 = 120 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). Once you hit the maximum Centrelink Pension payments it can no longer rise regardless of falling asset values.
Taking Action & Updating Centrelink
- Centrelink generally seek half yearly updates from Allocated Pension accounts. However, there is usually a delay in this information flowing through to calculations and does not always coincide with falling asset values.
- You can however update Centrelink yourself at any stage rather than waiting several months for Centrelink scheduled updates to take effect.
What To Do?
The first step is to use your mygov login to look up your “Income / Assets Statement” and check the asset values Centrelink have recorded (and the date they were last updated). You can also request this from Centrelink personally.
If your current asset values have significantly reduced compared to the latest Centrelink records, you can provide an update on your current asset balances to Centrelink via the mygov website.
Any 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. Most of the feedback I receive is that the process is fairly quick once the updates have been provided.
4. RESET ACCOUNT-BASED (ALLOCATED) PENSION PAYMENTS
The Australian Government has yet again extended the reduced superannuation minimum drawdown rates for account-based pensions and similar products by 50 percent for the fourth time for the 2022/23 financial year. The following table illustrates the continued reduction to the minimum pension drawdowns.
|Age||Standard Default minimum drawdown rates||Reduced rates by 50% for 2022/23 financial year|
|95 or more||14%||7%|
Resetting Your Allocated Pensions
With the start of another year comes the resetting of your Account Based Pensions. Your Pension Provider will do this automatically for you, so you may not need to make any changes if you are content with the new settings. You do however retain the choice to revisit and alter this at any time it is NOT set in stone for the year.
Alternative Strategies For Account Based (Allocated) Pensions
There are generally two methods of setting your Allocated Pension and you can change from one method to the other at any time during the year.
a) The Minimum percentage (refer above table)
Under this method, your pension payments will reset/recalculate every 30 June.
Anyone who is on regular pension payments (fortnightly, monthly or quarterly) will now by default have already received the first of this year’s payments. New pension settings are based on your balance as at 30 June. For most people, this will correlate to a reduction in pension payments this year due to a drop in asset values (compared to 12 months ago – 30/6/21).
If the Minimums are enough – For those that have large liquid holdings outside of super or sufficient alternative income sources (eg Defined Benefit pensions, rental income, part-time work, Centrelink pension, etc) – you can continue to take advantage of the discounted pension minimums for one more year and leave your pension accounts to recover.
If Minimums Are Not enough – For some the rising lifestyle budget or depletion of personal cash resources may mean that the Minimum levels may simply not be enough income.
In this case, your pensions can be reset based on a Fixed / Flat Dollar Amount
b) Fixed / Flat Dollar Amount
You could set your pension payments to a fixed amount to match your budget. This can be as specific as you like. For example, it could be $1,730.77 per fortnight (if you wish to target a $45,000 p.a.) to cover an identified shortfall in your budget.
This strategy is well suited if your Allocated Pension income is your predominant source of income and you are a strong budgeter.
Under this scenario, your income will not change with fluctuating markets each year change (as it is not based on a percentage-based calculation), and will continue to pay the same amount year after year until such time as you wish to make an alteration. The only requirement is that your chosen fixed amount is at least above the legislated Minimum for your age.
There are several leavers you can pull that will assist in managing your cash flow through changing times and a volatile market. 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, but that does not mean “Do Nothing”.