Tomorrow, the Reserve Bank is widely expected to reduce the official cash rate to 2.0% – lower than during the worst months of the Global Financial Crisis when the official rate reached a low point of 3.0% in April 2009.
The rate of interest paid on bank deposits is now lower than it was during the GFC. With term deposit rates offered to SMSFs less than 3%, combined with inflation of 1.3%, real rates of return are less than 2%.
At the time of the GST, recognising the effects of low interest rates on the income of retired people, the Government halved the minimum pension that must be withdrawn each year from 4% to 2% of the value of assets in their account (see table below).
It is now time for the Government to again consider reducing the minimum pension rate.
SMSFs typically hold a relatively large proportion of their assets in cash. The latest ATO statistics (December 2014) show that SMSFs hold $156 billion in cash and term deposits amounting to 28% of total SMSF assets.
The concentration on cash is even more pronounced in smaller funds. Smaller funds (less than $200k) hold 45% or more of their assets in cash; the average fund ($1-2m) hold 33% in cash.
With $156 billion held in cash by SMSFs, each 0.25% reduction in interest rates reduces overall SMSF earnings by $390 million.
Compounding the effect of low interest rates on fund earnings, it is likely that, in time, dividends from listed companies will be lower given the general slowdown in economic activity in Australia.
Returns from property investment (rents from directly owned property and returns from property trusts) may also be lower.
These factors raise concerns for fund members, including SMSF owners, that running down their superannuation savings will leave them unable to cope with contingencies, such as high aged care costs in the future, and even that they may run out of savings if they live longer.
During the years when interest rates and investment returns were depressed by the GFC the Government lowered the minimum pension drawdown rates to 50% of the normal rate (2008-09 to 2010-11) and then to 75% (2011-12 and 2012-13). The normal rates were restored from 2013-14.
See table below:
|
Age |
Minimum pension |
GFC level 2008-2011 |
GFC level 2012-2013 |
|
55-64 |
4% |
2% |
3% |
|
65-74 |
5% |
2.5% |
3.75% |
|
75-79 |
6% |
3% |
4.5% |
|
80 -84 |
7% |
3.5% |
5.25% |
|
85-89 |
9% |
4.5% |
6.75% |
|
90 – 94 |
11% |
5.5% |
8.25% |
|
+ 95 |
14% |
7% |
10.5% |
