What a relief! Minimum pension payments halved for 2010/2011 year

Update: The relevant regulations extending the pension payment relief for the 2010/2011 year are now in place. For verification, see Schedule 7 of the Superannuation Industry (Supervision) Regulations 1994.

Finally, we have some good news for those retirees struggling to recoup savaged investment earnings from the ever-choppy investment markets.

The drawdown relief provided for account-based pensions during the 2009/2010 and 2008/2009 financial years will NOW be extended for the 2010/2011 year. This is great news for retirees attempting to preserve capital, although the announcement may be cold comfort for those retirees who still need to sell assets to provide a regular income.

Briefly, what the extension of payment relief means for individuals receiving superannuation income streams, is that for the 2010/2011 year, the minimum payment amounts for account-based pensions will continue to be half of the normal requirements. For example, an individual aged 65 must withdraw 2.5% of his account balance for the 2010/2011 year, rather than 5% under the regular minimum pension payment rules.

In a previous article, I reported that the Government had been silent on the issue in the Henry Tax Review report, and in the Federal Budget, which implied retirees taking superannuation pensions were entering the new financial year with expectations that pension payments would be back to normal. I believe that the Government were not going to provide temporary pension relief, but due to intense lobbying by certain groups (and hopefully SuperGuide’s efforts as well), the Government realised the severe financial impact for retirees being forced to sell assets at a loss, rather than allowing retirees to preserve capital.

Quoting from the Government’s 30 June 2010 release:

Many self-funded retirees with account-based pensions have suffered significant capital losses on their pension portfolios due to the impacts of the global financial crisis.

The Government applauds the efforts of self funded retirees who have saved to fund their own retirement. We understand that the global financial crisis is having an ongoing impact on the portfolios of self-funded retirees.

While equity markets have recovered to an extent over the past year, they remain well below the levels reached prior to the onset of the global financial crisis.

The temporary minimum pension payment relief applies to account-based pensions and annuities (payable since 1 July 2007); allocated pensions and annuities, and market-linked (term allocated) pensions and annuities.

This change requires amendments to the Superannuation Industry (Supervision) Regulations 1994 and the Retirement Savings Accounts Regulations 1997. According to the Government, the necessary regulations will be made as soon as possible in the new financial year.

As I wrote in an article on this topic just two weeks ago, extending minimum payment relief has minimal effect on Australia’s bottom line but has the potential to dramatically improve the future financial health of our country’s retirees. I have rewritten the relevant sections of this earlier article (see below) to explain the general rules applicable to minimum pension payments.

I consider this great news for retirees taking superannuation pensions because many Australians are still trying to rebuild account balances decimated during the Global Financial Crisis, and knocked around by the still volatile investment markets of the past few months.

Minimum annual pension (income stream) payments

Note: Amount calculated on 1 July each year, unless first year of account-based income stream, and then pro-rated from commencement day. Minimum amount to be rounded to nearest $10.

Source: Adapted from Schedule 7, Superannuation Industry (Supervision) Regulations 1994 and Federal Government news releases dated 18 February 2009, and 12 May 2009, and 30 June 2010.

Background: If you have an account-based pension (or the older-style allocated pension) you must pay a minimum amount at least annually. If you’re aged 65 to 74, the usual minimum pension payment for an account-based pension is 5% of your pension’s account balance. Under the temporary relief, you are required to withdraw a minimum of 2.5% of your account balance as at 1 July 2010 (for the 2010/2011 year). For example, Robert is 68 and has $500,000 in his pension account. His minimum pension payment is $25,000 under the regular pension payment rules, but under the temporary relief his minimum payment is $12,500.

Unfortunately, for some retirees the temporary relief isn’t enough and they still face the prospect of selling assets in a falling market to finance annual income streams, or to maintain their existing standard of living.

Returning to work?

If you’re facing a severe cash crisis, then you could consider returning to the workforce to boost your super savings or to supplement your pension income. Many retirees continue to work in some form even when they have started an income stream. A popular question that many retirees ask, is whether they can still contribute to super, notwithstanding they are already drawing an income stream from a super fund.

The answer is ‘yes’ in most cases. If you’re under the age of 65, you can make super contributions without having to satisfy a work test. If you’re aged 65 or over (but under 75), then you must satisfy a work test to be able to contribute to a super fund. The work test is not onerous – you must work 40 hours in a 30-day period during the financial year in which you intend to contribute. If you aged 75 or over you cannot make any super contributions.

Tip: You could also consider whether you’re eligible for a part-Age Pension. Any change in your financial circumstances may mean that you become entitled to the Age Pension for the first time, or, if you already receive some Age Pension, a greater entitlement. Returning to work may also affect your Age Pension entitlements.

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