Why does the ATO make me withdraw so much from my super fund?

I am a widow aged 79 with a self-managed super fund. I draw a super pension plus a small wage from my company. Why does the ATO make me withdraw so much money from my super fund for my pension?

The super fund owns a townhouse in Brisbane and has about $1 million in Australian shares. I have looked after all the shares in the super fund for the past 20 years since my husband died, but now I am selling some shares to be able to withdraw the required amount of super pension every year. The unit rental and the share dividends do not cover this required amount. As time goes by, more shares will have to be sold, which will result in less annual dividends.

The purpose of requiring fund members to draw a minimum pension each year, which increases with age, is that the government wants to limit the amount of funds held in the zero-tax pension environment. It’s a reasonable proposition.

And remember, you can always move your money back to accumulation, but the fund will then be paying a flat 15 per cent tax on its earnings, though there will be no requirement to draw a minimum pension.

If you are receiving other income, it may be worth talking to your accountant to see whether part of your superannuation fund should be moved back to accumulation. It depends on your overall situation and the income you receive from assets outside superannuation.

The papers often say you don’t need much to retire. But they rarely mention inflation. While $75,000 a year may look fine today, what will it really buy in 20 years? As a self-funded retiree, it’s hard not to think you’ll need more than the suggested amount, especially with low-interest rates. And for people depending on support, will the age pension keep up with inflation and still provide enough security in the future?

Articles suggesting you don’t need a large sum to retire usually assume you’ll qualify for a part-age pension. But with governments under budget pressure, future entitlements could be reduced.

Currently, couples with about $1,070,000 in assessable assets, plus their home, can receive a part pension, but there’s no certainty these rules will last.

The best strategy is to take control now: prepare a budget using today’s figures, omitting work-related costs such as a second car or commuting. Then adjust the numbers for inflation using one of the many online calculators – 3 per cent is a realistic guide.

Remember, the amount you’ll need depends not just on what you have at retirement, but on how long your money must last and the returns you can earn once you start drawing an income.

This is the perfect time to engage a good financial adviser. They can review your current assets to ensure the mix is right for your goals, and prepare projections based on future expenses and expected returns. From there, an annual review and fine-tuning will help ensure your retirement plans remain on track.

Where do I find the balance of my transfer balance account and my personal transfer balance cap?

The easiest way is through MyGov. By linking the ATO to your MyGov account, you can view key superannuation information, including your personal transfer balance cap, your highest transfer balance, your available cap space and a record of all credits and debits to your transfer balance account.

This gives you a clear snapshot of how much of your cap has been used and what capacity remains. But a word of caution: the information may not always be complete, particularly if you are a member of a self-managed super fund.

That’s because reporting can be delayed, meaning the ATO’s records might not reflect the most recent transactions. It’s always wise to double-check figures with your fund or adviser before making decisions.

I am 71 and have been investing in shares for many years, so I understand the basics of dividends and franking credits. Recently, I noticed that the GEAR ETFs is showing a dividend that is 389 per cent franked. That number doesn’t seem to make sense – I thought franking credits could only go up to 100 per cent. Does this mean I receive almost four times the usual benefit from franking, or is there something else going on here?

Keep in mind that the fund you mentioned is a geared fund, which means its portfolio has a substantial borrowing component (which is giving you automatic leverage). This can be a good or a bad thing depending on the performance of the market, but most geared funds in Australian shares are OK if you hang in there for the long term.

The amount of franking will depend on how they wish to allocate the internal elements of the fund and the administration. But here’s a hypothetical situation. If you invested $10,000 in a share portfolio and borrowed $90,000, you’d have $100,000 working for you.

You would then be receiving franking credits based on a $100,000 investment, even though your own contribution is just $10,000.

Noel Whittaker is author of Retirement Made Simple and other books on personal finance. Questions to: noel@noelwhittaker.com.au

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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