Waste not, want not

Minimum pension drawdowns limits doubled on 1 July; are you ready?

Account-based pensions are flexible retirement income streams. When you stop and think about it, there are very few restrictions on what you can do with them. If you are retired, you can access your money whenever you like, you can switch providers, you can choose how you invest, you can choose the level of income you desire, and there is no maximum drawdown imposed.

Return to normal

But there are minimum drawdown limits. And they doubled on 1 July, requiring account-based pension members to take twice as much income in the coming financial year. It’s a return to normal, but it doesn’t feel like it.  For the past four years, the government has halved the minimum drawdown. 

The government wanted to give retiree members a fighting chance of preserving their money within the super system during the Covid market falls, so they reduced the amount needed to be drawn down each year. This temporary initiative worked very well during the Global Financial Crisis.

Too much of a good thing

If you chose to take up the temporary drawdown relief all those years ago, this year, you might find yourself with more money to live on than you are used to.  And that might be a good thing. With the cost-of-living squeezing household budgets, you may require every cent just for day-to-day living.

But it may also be a bad thing. You may find yourself with too much money coming in.  Keep in mind that an account-based pension will eventually run out if you consistently withdraw more than your investments are earning.  In practice, every dollar more than your cash flow needs today is robbing your future self, especially if it is wasted.

Behaviour gap

Human beings have no innate sense of discipline. Any self-disciplined behaviour is learned from the environment.  It’s why we have so many regrets when it comes to our finances. All of us haven’t done things that we intended to do, and we’ve all done things we had no intention of doing. It’s what author Carl Richards calls ‘the behaviour gap’.

We know that we should save our excess cash flow and allocate it to investments, but most of us either don’t or we do so in an inefficient manner.  That’s why there is a real risk that if a retiree receives a pension level above their day-to-day needs, the excess will be unwittingly wasted and not contribute to the achievement of lifestyle objectives or financial well-being.

At Daniel Crump Financial Planning, we are independent financial advisers. Our advice is focused on you, not your super. We can help you put in place mechanisms so that you have enough money to live on in retirement while still saving and investing your money efficiently.

This article is general and does not consider your personal circumstances, so it may not be appropriate to you.  If you would like advice specific to you, please let us know.

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