Should you develop a retirement income strategy for your SMSF?

Since 2022, all Australian Prudential Regulation Authority (APRA)-regulated super funds have been required to have a retirement income strategy in place for fund members who are approaching or already in the retirement phase of superannuation.

This requirement forms part of the Retirement Income Covenant (RIC), which was introduced under the Corporate Collective Investment Vehicle Framework and Other Measures Act 2021.

While the RIC puts a greater focus on how all super fund trustees satisfy the income requirements of members in retirement, self-managed super fund (SMSF) trustees will not be legally obliged to comply, as SMSFs are not regulated by APRA. They are instead regulated by the Australian Taxation Office (ATO).

However, when SMSF trustees develop their investment strategy, they are required to take into account the individual needs of all fund members. When a fund has members in both accumulation and retirement phase, its investment strategy must explain how it meets the needs of both groups. It should therefore address retirement income for members who are in, or approaching, retirement.

The Retirement Income Covenant

The federal government first announced its intention to introduce a retirement income covenant for all super fund trustees, including SMSFs, in the 2018–19 Budget. It wanted to strengthen existing covenants in the Superannuation Industry (Supervision) Act 1993 (SIS Act), which include obligations to formulate, regularly review and give effect to investment, risk management and insurance strategies. The proposed RIC was intended to ensure that trustees addressed members’ retirement needs.

“The draft legislation would codify the obligation for superannuation trustees to have a retirement income strategy that outlines how they plan to assist their members in retirement. The strategy must consider how the trustee will assist their members to balance maximising their retirement income, managing risks and having some flexible access to savings,” former Minister for Superannuation, Financial Services and the Digital Economy, Senator Jane Hume, said when releasing the draft legislation.

But after lobbying by sections of the SMSF industry, SMSF trustees were dropped from the draft legislation.

How did the Retirement Income Covenant come about?

The covenant stems from concerns that retirees do not draw down on the capital of their super balance, and instead attempt to live on the income from that capital balance.

“The ‘nest egg’ framing of superannuation compounds the complexities around deciding how to manage their superannuation in retirement. Partly because they have only ever been primed to save as large a lump sum as possible, retirees struggle with the concept that superannuation is to be consumed to fund their retirement,” the initial discussion paper stated.

It goes on to say that “multiple studies have shown that retirees die with around 90% of the assets they had at retirement” and that without a change in behaviour it is projected that by 2060 one in every three dollars paid out of the superannuation system will be part of a bequest.

The paper drew on findings from the Retirement Income Review 2020. However, a separate study by the Association of Superannuation Funds of Australia (ASFA) – Superannuation balances of Australia just before death – found that most Australians actually exhaust their super before they die.

Using Household, Income and Labour Dynamics in Australia (HILDA) survey results, ASFA found more than 90% of people aged 80 or over who died in the period 2014 to 2018 had no super in the four-year period before their death, and only 5% of that group had more than $110,000 in super in the period of up to four years before their death.

What does it mean for SMSFs?