The positive case for the retirement income covenant for SMSFs
In July, the Government released a consultation paper on the long-awaited retirement income covenant. The aim of the new measure is to improve the retirement outcomes of Australian retirees by requiring the custodians of their savings, superannuation funds, to develop coherent retirement income strategies for their members. See our earlier blog for more details.
Our general manager, Doug McBirnie, shares his thoughts below on how the retirement income covenant could be a positive measure for SMSFs.
Some commentators have suggested that applying the covenant to SMSFs is inappropriate and simply adds red tape. They argue that the retirement income strategy is likely to become another template document to add to the list for SMSF trustees to sign, which adds little value. I disagree. Done right, the covenant has the potential to improve the retirement outcomes for many SMSF retirees.
The Government is concerned about retirees not spending their tax concessional superannuation over the course of their retirement. ATOstatistics1 show that typical SMSF balances for 65-69year-olds are very similar to those of 75-84 year-olds. This suggests that many SMSF retirees are living off the income generated by their retirement savings rather than consuming capital. Now that’s fine (with me anyway) if those retirees are happy with their level of income and would prefer to leave their superannuation savings to the next generation. However, survey after survey has also shown that the reason many retirees don’t spend their savings isn’t because they’ve got more than they need, but because they are afraid of running out. For example, recent research2 found that most older Australians (53%) are worried about outliving their savings.
The proposed retirement income covenant will require SMSF trustees to develop a retirement income strategy that, among other things, considers:
- Members’ finances at a household level (e.g. for a couple)
- Whether they own their own home
- Applicable taxes
- Eligibility for the Age Pension, not just now, but throughout retirement
- Flexibility to meet unexpected costs, and
- The key risks faced by retirees – such as longevity, inflation and investment risks
This will require detailed cashflow planning, calculations, and projections that allow for uncertain lifespans. Accountants and advisers will be able to use their expertise to help SMSF trustees to develop sustainable retirement spending plans. More SMSF trustees may feel compelled to seek out that advice. New tools are likely to be developed to help SMSF trustees do this for themselves.
My view is that this will help many SMSF trustees develop better plans to meet their goals in retirement, whatever those goals might be. Maybe some of those retirees who would otherwise be too nervous to spend their savings can be given comfort that, with the right plan in place, they can afford to enjoy their retirement a little more. That sounds like a good outcome to me.
1. ATO Statistics: Self-managed super funds: A statistical overview 2018-19.
2. National Seniors Australia Retirement Income Worry (2020)