Investors in their own SMSFs not only are facing uncertainty in financial markets but also in government policy, where vital aspects of the super system are now being debated ahead of likely action at budget time.

So, what can SMSF investors do? For those in accumulation mode, there may be dangers in simply rushing to put more money into their fund without talking with their advisor on possible long-term implications. For instance, how much money should they have outside, as well as inside, super for maximum flexibility?

For those in pension mode, it will all depend on details of any changes – especially that the government adheres to the historical practice of grandfathering any changes.

But apart from potential changes, there also is one current problem – the unrealistic minimum pensions from an SMSF – which the government needs to fix.

There appears to be populist support for limiting tax-free superannuation pension income from sums of more than, say, $2.5 million.  SMSF investors might be less concerned about limits on contributions but limiting future tax-free pensions could spark electoral backlashes.

The reason: low and volatile investment returns already are reducing funds’ earnings and fund members are having to lower their expected rates of future investment returns.

But government rules automatically increase the minimum pension payout rates, which prevent SMSF members running a more conservative payout regime. Someone aged 65-74 and lucky enough to have a $2.5 million fund is required to pay out 5% or $125,000 p.a. in pensions, regardless of what the fund earns – effectively reducing capital in any year in which earnings
fall below 5%. When the pensioner turns 75, that minimum rises  to 6% – or $150,000 a year, regardless of the fund’s earnings.

Persistently low interest rates would mean SMSF pensioners face minimum pension payouts rising indefinitely, while their investment portfolio is subject to volatile returns and may run out earlier than they expected.

Certainly, investors will have access to the excess payouts but these funds will be outside their SMSF  – which the government almost certainly prefers because of fears that SMSF’s tax status are being used to amass funds to pass on to descendants.

Forcing such a run down in SMSF balances ignores the fact that members have to manage the risk of out-living their savings as well as the investment risks – and that task has now become harder.

Recent calculations in a Morningstar research paper (Safe Withdrawal  Rates for Australian Retirees  by David Blanchett, Peter Gee and Anthony Serhan) suggest the previous accepted rule of thumb withdrawal rate of 4% p.a. of the fund might need to be scaled down to 2.5% to allow for investment costs and assumed lower returns in future.

The paper took a 30-year period to calculate how to make an invested lump sum last until death. Investors who want 99% certainty might need to start with a much lower withdrawal rate of 2.8%  – which of course is impossible even for under 65s because government mandated payout rates start at 4% and keep rising to 11% and beyond.

It’s clear that DIY pensioners already face tougher times. Even having a $1 million-plus fund may not help when they are forced to live off much lower investment returns and run down their capital faster than is prudent.

At the very least, the government now urgently needs to adjust the minimum payouts (as it did during the GFC) to recognise this financial reality.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.