Cost of Living Pressures Impacting SMSF Pensioners
As of 30 June 2024, the Australian superannuation industry holds $3.9 trillion in total assets.
Self-managed superannuation funds (SMSFs) make up over a quarter of these assets – $990 billion to be exact – demonstrating steady growth with more than 625,000 funds in operation[1].
The Class Benchmark Report – a report which utilises data from over 180,000 SMSFs on the Class Super platform – is an annual report which uncovers the key trends and insights shaping the SMSF industry and includes collaborations from industry experts.
This year, Accurium was given the opportunity to undertake an analysis of anonymised Class pension account data from the last five financial years. Below, are some interesting insights which highlight trends and opportunities for members with pensions in their SMSF.
Key insights
An examination of Class data[2] with respect to member pension accounts shows that in the 2024 financial year, the number of SMSF members with account-based or transition to retirement pensions who failed to meet the required minimum pension payments doubled in comparison to 2023.
Additionally, we discovered that despite the potential benefits of using a partial commutation strategy for withdrawals above the minimum pension requirements to maximise their transfer balance cap space, few high-net-worth individuals have adopted this approach, highlighting an opportunity for providing advice to members in this space.
Lastly, more retirees are choosing to delay pension commencements beyond age 65, potentially due to rising costs of living. For those under age 65, the use of TRIS (transition to retirement income stream) accounts is in decline.
SMSF members caught out by increasing minimum pension requirements in 2023-24
Pension account data from the 2024 financial year shows that 5.4% of members with ABP (account-based pension) or TRIS accounts failed to make pension payments equal to their required minimum payment, compared to 2.7% in 2023.
Chart 1: Proportion of members who failed to meet the minimum pension standards[3]
This material increase in non-compliance with the pension standards may be attributed to the increase in the minimum pension standards for the 2024 financial year. Minimum pension requirements were halved from 2019-20 to 2022-23, but this was removed in 2023-24, As such, the minimum drawdown rates were double that of previous years.
The additional members failing to meet the minimums in 2024 compared to prior years based on current data in Class, highlights that many SMSF retirees may have been caught out by the increase to the pension standards.
The consequences of failing to meet the pension standards can be material for trustees, with a loss of eligibility to claim exempt current pension income, and additional administrative work required to complete transfer balance reports and new pension documentation.
This is further highlighted with the updated ATO pension ruling publication, TR 2013/5, which implies that the potential adverse income tax and transfer balance cap implications could extend beyond the financial year in which the minimum pension was not met[4].
High net worth SMSF members missing out on strategic opportunities to maximise space in their transfer balance cap
Examining the drawdown behaviour of members with ABP and TRIS accounts, of those members who met the minimum pensions standards, in 2023 around 49% of members were drawing a pension payment within 10% of the minimum payment required and 51% were drawing a payment in excess of that.
In 2024, this increased materially showed that 63% of members were only drawing around their minimum payment rate. With the minimum drawdown requirements doubling for 2023-24, it is not surprising that the increased minimum payment would now be sufficient for more members, meaning fewer felt the need to draw more than the minimum to fund their retirement income needs.
Chart 2: Proportion of members withdrawing at or above minimum pension requirements in the 2022-23 and 2023-24 financial years[5]
Interestingly in 2024, of members who drew payments more than the minimum requirement, only 1% appear to have strategically maximised their transfer balance cap by taking payments in excess of the required minimum as a ‘lump sum payment’ (a partial commutation of the pension) instead of a ‘pension payment’[6] – a trend that is higher than prior years.
This is surprising as this strategy could be particularly beneficial for couple members to maximise space in their transfer balance account to receive death benefits as a retirement phase income stream.
Examining the results based on total pension account balances above and below $1m, it was found that in the 2024 financial year, members with balances of $1m in pension or above was four times as likely to use the lump sum strategy compared to those with balances under $1m, 2.4% of members vs 0.6% of members.
However, these are still small numbers and highlights an opportunity for practitioners to discuss with their clients their drawdown needs and assess whether utilising a partial commutation strategy would be beneficial for them.
SMSF members not immune to cost of living pressures
Examining drawdown rates for members with ABP and TRIS accounts over the last five years who met the minimum pension standards, show that the average drawdown rate across members of all ages reduced from 2020 to 2022. The average drawdown rate increased from 6.4% in the 2023 financial year to 8.5% in the 2024 financial year.
Chart 3: Average drawdown rate of members with ABP or TRIS accounts who met the minimum pension standards[7]
In the 2024 financial year the halving of the minimum pension standards ceased, and so the required drawdown rate increased 100% in the 2024 financial year compared to 2023, however the data suggests that the increase in drawdowns is not solely due to the increased minimum rates.
Chart 4: Average drawdown rates for members above preservation age with ABP or TRIS accounts compared to the drawdown rate required under the minimum pension standards[8]
Examining drawdown rates for members with ABP and TRIS accounts grouped by age vs the minimum pension standards, we can see that in 2023 where minimum pensions were halved, the average drawdown rate for SMSF members was well in excess of the required minimum rate, suggesting that the minimums alone were not sufficient to support a member’s desired retirement income. Then in 2024, with the minimum rates back to full levels, average drawdowns increased across all ages.
The increase in minimum payments does not fully explain the observed increase in drawdown rates. For cohorts under age 80, the 2023 average drawdown rates would have been sufficient to meet the 2024 higher minimum pensions and so members would not have ‘had’ to increase their drawdown rate to accommodate the change in minimum pension requirements.
Despite this, a material 31% increase in the average drawdown for this age group from 6.3% to 8.3% was observed. This suggests that SMSF retirees may not be immune to recent increases in cost of living and have adjusted their pension drawdowns accordingly to meet higher costs of living.
More SMSF members are delaying pension commencements past age 65
An interesting finding from examining pension commencements over recent financial years for persons aged at preservation age to 74 has identified a general trend of a delay in pension commencements at these ages.
Chart 5: Distribution of pension commencements for members under the age of 75[9]
The proportion of all pensions commenced in the last five financial years by members aged 65 to 69 has remained steady, at around 39%. However, the proportion of pensions commenced by those under 65 has steadily declined from 26% in 2020 to 19% in 2024. The proportion of pensions commenced by those aged 70 to 74 has increased from 36% to 42% over the same period.
This delay in the age at which members are commencing pensions could be an indication that SMSF retirees are delaying their retirement from the workforce due to increased costs and worry about if they can comfortably afford to retire. It also highlights the opportunity to ensure members are aware that they are eligible to commence an account-based pension once they turn 65 – even if they wish to or need to keep working.
Looking at members of preservation age and above with ABP or TRIS pension accounts in 2024, only 11% of all pension accounts were paid to members in the under 65 age group. Around 87% of these pension accounts are ABPs and only 13% are TRIS.
Use of TRIS by SMSF members continues to decline
Under age 65 where a person has not yet met a nil cashing restriction condition of release but has met preservation age, superannuation can be accessed by commencing a TRIS to supplement income as a person winds down working hours to retirement.
Since 1 July 2017, a TRIS is not considered a retirement phase income stream eligible for tax free earnings unless the member has reached age 65 or met a ‘nil’ cashing restriction condition of release.
Upon attaining age 65 or reporting attainment of another nil cashing restriction condition of release, such as ceasing an employment arrangement on or after age 60, to the trustee the TRIS will convert to retirement phase and, like an ABP, earnings will be tax free.
Whilst the number of pension accounts held by members under age 65 has been reducing over time due to the reduction in new pension commencements in this age group and as members age and move out of the cohort, the proportion of pension accounts which are a TRIS has also reduced from 21% in 2020 to 13% in 2024.
Under age 60, the retirement condition of release to commence an ABP requires no intention to become gainfully employed on at least a part-time basis again in the future, from age 60 this requirement is removed.
As such, with preservation age at 60 from 1 July 2024, we expect the number of TRIS commencements to continue to fall as members are more likely to meet the retirement condition of release upon attaining preservation age, and so commence an ABP, instead of a TRIS.
In summary
The 2024 Class Benchmark Report highlights key trends shaping the SMSF sector, emphasising both opportunities and challenges. With increased minimum pension requirements and rising living costs impacting drawdown behaviours, there is a clear need for strategic financial advice. Additionally, the decline in TRIS accounts and delayed pension commencements reflect evolving retirement decisions.
As the SMSF landscape continues to adapt, proactive guidance will be crucial to help members navigate these shifts effectively. You can find out more about the SMSF Benchmark Report 2024 here: Class Benchmark Report 2024 – Class
References
[1] Quarterly superannuation performance statistics – September 2004 to June 2024, APRA, published 29 August 2024, https://www.apra.gov.au/quarterly-superannuation-statistics.
[2] The results in this report section are based on analysis of pension account data from members in Class provided to Accurium. The data is relied upon as given and has not been independently verified. Data considers pension accounts from financial years 2019-20 to 2023-24. Data for the 2024 financial year represents about 70% of the final expected data points due to pension account details not yet entered in Class. We have assumed the data available for 2024 is representative of the full data for the 2024 financial year.
[3] Pension accounts which were account-based pensions or transition to retirement pensions, analysis of total payments attributed to ‘pension payment’ in the Class data compared to the minimum payment required. Results for 2023-24 financial year is based on members where a period update has been completed post 30 June 2024.
[4] To further understand the implications of TR 2013/5 review the blog “ATO releases update to pension ruling which may lead to increased costs” on the Accurium website.
[5] Includes members with TRIS or ABP accounts where the total payment, being the sum of pension payments and lump sums, was made up of a pension payment no more than 10% above the minimum required amount plus a lump sum payment, or where the total payment included pension payments more than 10% above the minimum required amount.
[6] Payments treated as lump sums do not count towards a member’s pension payments assessed against the minimum pension standards but instead a transfer balance account debit for the value of the lump sum can be reported for the member, reducing their transfer balance account.
[7] Drawdown rate calculated per member per pension type per year based on total annual drawdown from pensions divided by total starting balance of pensions, excluding members who did not meet the pension standards, excluding pensions which commenced in the year, and excluding years where the drawdown was 50% of the pension balance or more to remove outlier scenarios where the member may be commuting the pension in full or is making a very large one-off withdrawal outside their usual drawdown requirements. Results for 2023-24 financial year is based on members where a period update has been completed post 30 June 2024.
[8] Includes members who in a financial year had met preservation age, and who had an existing TRIS or ABP, or commenced the pension at 1 July of the financial year, and who met the minimum pension standards in that year. Results for 2023-24 financial year is based on members where a period update has been completed post 30 June 2024.
[9] Members commencing an ABP or TRIS where their age at commencement was between preservation age and age 74.
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