Retirement is the time to enjoy your hard-earned freedom. With an account-based pension you can receive a regular, tax-effective retirement income, with the flexibility to nominate the payment frequency and amount you receive. But with recent share market volatility you may wonder how to make the most of your pension, which may include limiting how much you draw down your growth assets after a major drop in share markets.
If you have an account-based pension that holds growth assets (such as shares), there are two main ways to avoid drawing down on these assets after a heavy drop in value. However, before we look at these options, it's important to understand how the value
of your account is worked out. Although you're not issued units, we've adopted unit pricing methodology to value your account. The value of your account depends on the unit price of the investment options you're invested in. The unit price can move up and down in line with the changes in the value of the assets.
Using a unit price to calculate the value of your account is similar to the way you calculate the value of shares you may own. Each day, the unit price is re-calculated and the value of your account goes up and down depending on whether the
unit price has gone up or down that day. When you withdraw money or receive (regular) pension payments from your account, the number of units you have reduces, using the unit price for the relevant day. If you ‘sell’ units (e.g. withdraw money) when
they’re lower in value, your funds may run out quicker than anticipated. For more information about how unit pricing works, read the Unit pricing at Mine Super factsheet (PDF).
One way to limit drawing down on your growth assets after a period of heavy losses in the market is by reducing your pension payment amount and / or putting off pension payments until later in the hope of a market rebound. The Government has extended the temporary reduction of the minimum drawdown amounts for the 2022-23 financial year. This will benefit account-based pension holders by reducing the need to sell investment assets at a lower point to fund minimum drawdown requirements. Mine Super also allows flexibility as to when and at what frequency you draw this minimum amount, meaning you can put off receiving the minimum annual payment until the end of the financial year (by which time the market may have recovered). Of course, this strategy only works if you have sufficient cash flow from other sources to cover your living costs.
Handy tip: You can change your pension payment amount or frequency over the phone by calling us on 13 64 63. |
The other way is commonly known as the 'buckets' strategy. This is when you're strategic about how your money is invested and where you draw money from. Short to medium-term needs are put into low-risk investment options such as cash and fixed income, where they can stay as a 'fall-back' option. If there’s a major drop in the share market for example, you can then select to receive payments from these low risk investments which haven't been affected by share market conditions. This means you're not reducing the units in your growth assets, giving them time to recover without having to sell at a lower point.
One downside to the 'buckets' strategy is that generally cash and fixed income will achieve lower returns over time than growth assets such as shares and property. To ensure you're not underexposed to growth assets, you can consider placing a similar amount into a higher risk investment, therefore still providing the same exposure to growth assets, while providing more choice as to where you draw funds from.
The 'buckets' strategy in practiceFinancial Adviser Josh Cuthbert from Mine Super Financial Advice explains how the 'buckets' strategy works for a member who wants their balance invested in a 'Balanced' investment option and wants to draw 8% of their balance per year. "Rather than holding 100% of their account value in the Balanced investment option, they could hold 12% in Cash, 12% in Bonds, 56% in the Conservative Balanced investment option and 20% in the High Growth investment option. This still provides roughly an overall 'balanced' allocation, but with the added benefit of more flexibility", Josh explained. "In this example, the two defensive options combined (Cash and Bonds) equal three years of drawdowns, which would give you three years for markets to bounce back while you’re not taking money out of the other investment options." |
You can even go a step further and invest in sector specific options. This is where rather than investing into pre-mixed investment options, you invest into individual sectors (i.e. single asset class investment options such as Australian Shares, International Shares, Property, Cash and Bonds). This provides further flexibility as to where you draw pension payments from and again, you can elect to draw from more defensive investments after periods of heavy drops in the share market. However, this strategy requires a regular review to ensure you meet your target asset allocation.
Did you know?For account-based pensions, if you don't make a choice, your money will be automatically invested in the Capital Guarded pre-mixed investment option. However, you can also choose your own mix of investment options. We don't charge fees for investment switches, and you can make a change at any time. Find out more about our different investment options or switch your option via your online account. |
Before you switch your investments, you should read our Product Disclosure Statement and Target Market Determinations (PDF), understand the available options and consider your individual needs, goals, risk tolerance and investment timeframe. You can read more about making a choice in our Making a pension investment choice factsheet (PDF). It may also be a good idea to discuss your needs with a qualified financial adviser.
If you're unsure, don’t forget we’re here to help. You can call us on 13 64 63 or email help@mine.com.au. If your needs are more complex, we can put you in touch with a financial adviser from Mine Super Financial Advice. For more information about what to expect from Mine Super Financial Advice, read this page.
A version of this article was first published in December 2020.