Older SMSF trustees relying on a real estate asset to fund their pension should be careful to ensure the returns from it do not outstrip the minimum pension drawdown rate as they move further into retirement, a superannuation legal expert has warned.
SuperCentral superannuation special counsel Michael Hallinan said a key advantage of holding real estate in pension phase was that lease and rental payments can display less variability and volatility than other asset classes, making them appealing as a way to support an income stream.
“However, it is important that trustees and members understand that eventually the minimum pension drawdown rate is likely to exceed the net yield from real estate,” Hallinan stated.
“In the younger pension ages, the minimum pension drawdown rate is 6 per cent or less before age 80. In more advanced ages, the minimum pension drawdown rate increases to 7 per cent, at age 80, then to 9 per cent, at age 85, then to 11 per cent, at age 90, and then to 14 per cent, at age 95.
“Consequently, the problem of the net yield on the real estate being less than the minimum pension drawdown rate is likely to occur from age 80.”
He added this event did not mean direct real estate could not be held by a fund in pension phase, but rather the liquidity requirements of the pension had to be fully understood and advance planning undertaken to deal with it before the drawdown rate exceeded the yield.
The drawdown rate was not based on earnings and a pension had to be paid regardless of what those earnings were for the year, he pointed out.
“Trustees and members must understand the minimum pension drawdown requirement is based upon the capital value of the pension account and is not related to the level of investment earnings,” he said.
“If the net earnings for a financial year are very modest, say less than 2 per cent, or even negative, the minimum pension drawdown must still be paid. This may necessitate dipping into capital to satisfy the minimum pension drawdown.
“To address this risk, a portion of the pension account is usually represented by cash or highly liquid investments, which may represent 12 months’ or more worth of pension payments.”