Advisers reject minimum withdrawal rates

Ninety-seven per cent of advisers surveyed by Colonial First State said they were in favour of a reduction of the compulsory annual minimum withdrawal rates.

The current minimum withdrawal rates sit at four per cent for those under 65, five per cent for those between 65 and 74, and six per cent for those aged 75-79. The minimum withdrawal rate continues to increase until it hits 14 per cent for retirees over 95.

Speaking at a Finsia lunch on Tuesday that saw the launch of new research into withdrawal rates, Colonial First State general manager for advocacy and retirement, Nicolette Rubinsztein, unveiled the results of a survey of 200 First Choice advisers.

The survey found 96 per cent of surveyed advisers had clients affected by the minimum withdrawal amounts, she said.

“In other words, those clients are being forced to take more income than they actually want to live on,” Ms Rubinsztein said.

One adviser surveyed said that the minimum should be whatever the client needs.

“If the government is going to change the deductible amount for Centrelink income test purposes and start deeming the money, they should then allow clients to take out what they actually need, rather than have this dictated to them,” said the adviser.

Asked whether they would accept a reduction of the 4 per cent rate, 97 per cent of surveyed advisers were in favour of a reduction, while 49 per cent of them – a vast majority – said two per cent would be the right level.

To put the results in context, Ms Rubinsztein pointed out that the government is “trying to avoid people using their super as a tax avoidance vehicle and using large amounts”.

“It is very much a balancing act of trying to get [withdrawal rates] low enough so they last for increasingly long periods of time in retirement since people are living longer – but high enough so they are not used for estate planning purposes,” she said.

“There is some academic basis for that,” Ms Rubinsztein said, in reference to a Finsia research paper that brings the popular four per cent withdrawal rate 'golden rule' under scrutiny.

Speaking at the Finsia lunch with Ms Rubinsztein, Professor Michael Drew of Griffith University unveiled the paper How Safe are Safe Withdrawal Rates in Retirement? An Australian Perspective (co-authored by Dr Adam Walk also of Griffith University).

“The much celebrated four per cent rule has become a popular heuristic that has provided a quick shortcut to ‘solving’ this most difficult of retirement planning problems,” the report said.

“The study finds that there is one key ‘known unknown’ in the debate – the ordering, sequencing or path dependency of returns,” it said.

Even with the exceptional performance of the Australian stock market over the last century, a four per cent withdrawal rate over 30 years on a 50:50 growth/defensive asset allocation is associated with a 20 per cent chance of financial ruin, Finsia chief executive and managing director Russell Thomas said in the paper.

Correction: This article previously credited Dr Anup Basu from Queensland University of Technology as a co-author of the paper How Safe are Safe Withdrawal Rates in Retirement? An Australian Perspective where in fact, the authors of the paper are Dr Adam Walk and Professor Michael Drew, both of Griffith University.