CALCULATING THE VALUE OF YOUR ACCOUNT

If you have an account-based pension that holds growth assets (such as shares), there are two main ways to avoid drawing down on these assets after a heavy drop in value. However, before we look at these options, it's important to understand how the value of your account is worked out. Although you’re not issued units, we use unit pricing methodology (PDF) to value your account. The value of your account depends on the unit price of the investment options you're invested in. The unit price can move up and down in line with the changes in the value of the assets. Using a unit price to calculate the value of your account is similar to the way you calculate the value of shares you may own.

HOW TO AVOID DRAWING DOWN ON GROWTH ASSETS AFTER A DROP IN VALUE

One way to limit drawing down on your growth assets after a period of heavy losses in the share market is by reducing your pension payment amount, in the hope of a market rebound. If you’re in the lucky position that you don’t need your pension payments immediately, you can also opt to hold off pension payments until later.

Handy tip: You can see your minimum annual payment amount in your online account. Go to My accounts, then click on My pension details.

Team Super offers flexibility as to when and at what frequency you draw this minimum amount, meaning you can put off receiving the minimum annual payment until the end of the financial year (by which time the market may have recovered). Of course, this strategy only works if you have sufficient cash flow from other sources to cover your living costs.

You can change your pension payment amount or frequency in your online account, over the phone or by using a form. Read more about changing pension payments.

THE 'BUCKETS' STRATEGY

The other way is commonly known as the 'buckets' strategy. This is when you're strategic about how your money is invested and where you draw money from. Short to medium-term needs are put into low-risk investment options such as cash and fixed income, where they can stay as a 'fall-back' option. If there’s a major drop in the share market for example, you can then select to receive payments from these low-risk investments which haven't been affected by share market conditions. This means you're not reducing the units in your growth assets (such as shares), giving them time to recover without having to sell at a lower point.

WHAT TO CONSIDER

One downside to the 'buckets' strategy is that generally cash and fixed income will achieve lower returns over time than growth assets such as shares and property. To ensure you're not underexposed to growth assets, you can consider placing a similar amount into a higher risk investment, therefore still providing the same exposure to growth assets, while providing more choice as to where you draw funds from.

THE 'BUCKETS' STRATEGY IN PRACTICE

Financial Adviser Josh Cuthbert from Team Super Financial Advice explains how the 'buckets' strategy works for a member who wants their account invested in a 'Balanced' investment option and wants to draw 8% of their account balance per year.

"Rather than holding 100% of their account value in the Balanced investment option, they could hold 12% in Cash, 12% in Fixed Income, 56% in the Moderate investment option and 20% in the High Growth investment option. This still provides roughly an overall 'balanced' allocation, but with the added benefit of more flexibility", Josh explained.

"In this example, the two defensive options combined (Cash and Fixed Income) equal three years of drawdowns, which would give you three years for markets to bounce back while you’re not taking money out of the other investment options,” finished Josh.

SECTOR SPECIFIC OPTIONS

You can even go a step further and invest in sector specific options. This is where rather than investing into pre-mixed investment options, you invest into individual sectors (i.e. single asset class investment options such as Australian Shares, International Shares, Property, Cash and Bonds). This provides further flexibility as to where you draw pension payments from and again, you can choose to draw from more defensive investments after heavy drops in the share market. However, this strategy requires a regular review to ensure you meet your target asset allocation.