Low cash rate hitting retirement investors
Pre-retirees and self-funded retirees should consider moving some of their investments into account-based pensions to maximise their after-tax returns in the current low official cash rate environment.
In releasing its annual account-based pensions report, financial research organisation CANSTAR has stated that those investing for retirement income should not rely on term deposits which return less than 1 per cent after inflation.
CANSTAR said that after an inflation rate of 2.4 per cent is taken into consideration on an average 12-month term deposit at 3.8 per cent, those at the lowest marginal tax rate will earn 0.78 per cent while those on the highest rate will make -6.9 per cent.
CANSTAR research manager Mitchell Watson said insufficient numbers of retirees were considering income streams for retirement, and while many remained in the superannuation system to draw down an income stream, many who were outside that system were missing out on tax-free investment earnings by not using an account-based pension.
Watson said that under the current legislation, investments earnings in account-based pensions were tax-free and a 60-year-old retiree investing $600,000 could earn an additional $76,000 over 10 years by using these pensions.
“Retirees have to draw down a minimum percentage of their account-based pension each year. Even taking that into consideration though, a retiree on the most common marginal tax rate could expect to earn an additional $76,000 over 10 years by choosing a tax-free structure. That’s a conservative figure on a low earning rate of just 3.8 per cent,” Watson said.
“The heady days of high-interest returns on capital-secure cash products has been gone for a long time now, and Australia’s current level of household debt would not sustain a return to high interest rates in the near or medium future. Retirees who want income security therefore need to switch their focus from chasing marginally higher interest rates on term deposits to focussing on reducing or eliminating their income tax.”
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