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SMSFs and Risk

Will the government apply a (capital) tax to this attractive amount sitting in Australian superannuation balances; or, in other words, nationalise it?

Can superannuation be simplified or do we learn to live with ever increasing complexity?

What impact will matters such as inflation, lifestyle uncertainties, medical uncertainties, investment returns, have on our general way of life?

Will global financial crises become regular events, or deeper?

Are our growth stocks and property around the world overvalued?

Borrowings by the United States Government are not sustainable. When the rest of the world agrees with this, what effect will it have on all of us?

In these difficult circumstances, will the superannuation pension/drawdown you are planning last from retirement to the inevitable celebration of your life?

One thing we do know is that cost of living increases can be difficult to budget for and are certain. They are like death and taxes.

It may be that the assumed increasing life expectancy may moderate or even reverse in the future. Regardless, the expense of keeping ageing bodies alive will clearly increase in real terms.

Hospitals become more expensive, the treatment costs increase, antibiotics are becoming less effective and their replacements are more expensive. Perhaps viruses and bacteria will evolve into more seriously dangerous life forms.

The impact of increasing population throughout the world could have a negative impact on our standard of living.

It may be that increased life expectancy will be available only to the top one or two per cent of the population capable of insulating themselves from the likely changes ahead; those who are less likely to join the increasing number of people on or below the poverty line.

With the many changes happening around us, the task of successful financial planning for longer lives becomes difficult and uncertain for everyone no matter whether they are in government or some other sector of the community.

Our conclusions

Without a crystal ball to help us, what can be said with some certainty about the future outlook for people approaching retirement?

  • We think that Government assistance will always be required for the very old. More assistance will be required with increasing longevity
  • Superannuation would seem the most effective strategy to achieve financial security.
  • Existing taxation treatment and legislative protections for superannuation funds need to be increased.
  • Taxes overall will have to increase for this support and the retirement age will have to increase.
  • Superannuation arrangements must certainly be improved – to ensure that we are able to enjoy a reasonable lifestyle.
  • There will always be a need for government support for some retired people. This will increase and therefore:

This rather gloomy picture is fundamentally due to our assumption of an ever increasing life expectancy. As we have pointed out there are factors which we have to take into account. It is obvious that we need to be conservative with our future investment assumptions.


Financing the later years of our life

None of us know how long we live. That is a good reason for the Government to reduce the Australian dependence on the Aged Pension. Compulsory superannuation was Introduced to reduce the massive liability the Government has with the Pension. The problem has now been transferred to Australian Citizens.

How long will we live for?

Actuaries can estimate what will happen to a large group of men and women. The individual life expectancy is a great unknown. Currently, the life expectancy for a male aged 65 is close to 20 years and 23 years for a female. Self Managed Superannuation Funds (SMSFs) can be built around this. However, if you expect to live to 100 because both your Mother and Father lived to 100 then you may need to keep working until you are close to 80!

The Personal Perspective

According to the September 2019 Self Managed Super Fund Magazine ( the average pension payments from SMSFs was:

2019 $68,215

More up to date information is available for the Australian Pension for couples

2021 $37,923

As we all should know, the pension reduces as the level of private savings and assets increases. Pensioners with SMSFs live a better lifestyle and are not financed by Government.

If you own your own house and have a particularly simple lifestyle, it is possible to live on the pension. It means no overseas trips, no visits to good restaurants, strict budgeting and always looking for the cheapest items in the supermarket.

Nevertheless it is government policy to reduce this dependence on the public purse by encouraging people to save for their future – and for this they receive a tax benefit.

It is not government policy to encourage luxuries on the pension. The exceptions are politicians and judges, who can afford luxuries from their generous government-funded pension schemes. For the rest of us, any improved lifestyle comes from the superannuation fund we build before retirement.

Here’s a simple illustration. Assume a retirement balance of $1 million. Every year for 20 years $50,000 can be taken out as a pension (ie a capital drawdown).

The superannuation fund can earn about 5 per cent. Inflation is assumed to be around 3 per cent. The remaining 2 per cent, or $20,000, in the first year is a bonus for holidays, upgrading cars or reinvesting. The amount equal to inflation should be reinvested so that the drawdown keeps up with inflation. A balance of $2 million will result in a lifestyle of $100,000 every year. Alternatively, it may keep retirees going for more than 40 years on a $50,000 lifestyle.

Some financial investment analysts suggest long-term returns averaging 7 per cent may be possible. Remember high returns and high risk go together.

Risks to Australian Superannuation Policy

This simplistic example gives a good picture of what to expect. If you would like a more complicated example, make an appointment with your expensive actuary.

The concern we have concentrated on is:

Financing longevity

There are others:

How will future Governments react to a large poole of Superannaution.
How many Covid 19s are waiting for us.
What do our Asian neighbours have in mind. The largest one will cause the largest problems.

If you would like to read a small treatise on Risk please read SMSFs and Risk