Retirees need to be careful relying on franking credits

Retirees relying on dividends and franking credits to support income may need to consider alternative options in case of further market and legislative risks, according to a panel.

Speaking on the Money Management Retirement Income Webinar, Brian Parker, Sunsuper chief economist, said one of the lessons of the last Federal election campaigns was the cost to the Budget due to franking credits had become significant.

“That issue could be re-visited by a future Government or opposition so although retirees have done very well in Australia because of fully-franked dividends and having significant exposure to Australian shares, what worked in the past may not work as well over the next five, 10 or 20 years,” Parker said.

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Even more broadly speaking, Parker said it was important that members and their clients had realistic expectations about what returns can be achieved.

“Especially as interest rates and risk-free assets are going to deliver very poor returns,” Parker said.

“How are you going to deliver CPI [consumer price index] plus 3.5% net when 20% to 30% of your portfolio is going to be delivering virtually nothing over the next three to five years and beyond. That is the challenge we face every day.”

John Maroney, SMSF Association chief executive, said many self-managed super fund (SMSF) retirees had achieved good performance from ASX-listed companies due to franking credits.

“The shifting away from traditional high allocations to listed shares and cash deposits is unlikely to occur quickly,” Maroney said.

“There’s certainly increased interest in diversification and opportunities for this, particularly for those in their 70s and 80s, they have done particularly well over the most of their retirement already.

“They are probably less likely to shift quickly, but again it’s important for them to think about the future direction of their asset allocations and their product selections as well.”

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