Retirement Income Covenant

Retirement Income Covenant: A retired couple sitting on a pier bench, admiring the evening view of the beach.

What is the Retirement Income Covenant?

The incoming Retirement Income Covenant will require trustees of superannuation funds, such as Financial Planners, to take into full consideration the retirement income needs of their clients, before developing a comprehensive strategy tailored towards those needs.

This strategy will need to be reviewed on a regular basis to ensure that it remains suitable as the client’s personal circumstances evolve. The covenant, which is currently being processed through Parliament but is expected to come into effect from 1 July 2022, aims to ensure that trustees fully understand the needs of their clients and can adequately service those needs.

Key Areas

A retirement planning strategy will need to cover three key areas:

  • Maximising the income available to the client at retirement age, possibly including the consumption of capital during their retirement.
  • Creating a reliable and sustainable retirement income, reducing as much as possible the risk of a client outliving their savings.
  • Providing flexibility with regards to how and when a client can access their funds during retirement.

Market and longevity risk must also be considered as key elements when working towards this strategy.

Why is the Retirement Income Covenant Needed?

The covenant is partly aimed at raising awareness around the importance of retirement and retirement planning, especially as most people can now look forward to spending multiple decades of their lives as a retiree.

We should aim to be both financially and mentally prepared for this period of our lives, and the covenant encourages financial advisors to take a more holistic view of retirement.

It also aims to ensure that retirees are prepared for the inevitable risks that they may face during retirement. Those without a suitable strategy in place will almost certainly need to make impactful spending and lifestyle changes to try to make their retirement income last.

How Will the Advice Industry Be Affected?

The Retirement Income Covenant provides a great opportunity for Financial Advisors and solution providers to work together. There is the potential to create sophisticated retirement solutions which, when coupled with reliable support and advice, will give clients greater confidence in managing their savings and protecting their future.

Baldwin Financial Services is based in the northeastern suburbs of Adelaide.
Contact us to find out how we may be able to help you.