What a relief! Minimum pension payments reduced by 25% for 2011/2012 and 2012/2013 years

Note: Click here if you are looking for the latest Age Pension rates

When you start a superannuation account-based pension you must withdraw a minimum amount each year, based on your age and size of your account balance, to enable the earnings on your super pension account to be tax-exempt.

Due to horrendous investment market performance in recent years and continuing volatility, the Federal Government has again reduced the minimum pension amount required to be withdrawn from pension accounts. The reduction in minimum annual pension payments is aimed to help mitigate drawing down on already savaged retirement saving balances, and to minimise forced asset sales to comply with the pension payment rules. (Unfortunately for some retirees with smaller account balances, they have no choice but to withdraw at least the minimum pension amounts in order to meet living expenses, which means the pension payment relief will be of no benefit to this category of retiree.)

In November 2011, the Government announced that pension payment relief will be available for the 2012/2013 year as well as for the 2011/2012 financial year. This is great news for retirees suffering through the poor-performing sharemarkets but I had hoped that Australians still recovering from the Global Financial Crisis would receive the 50% drawdown relief on account-based pension minimum payments that they had received for the previous 3 years. I had also hoped the Federal Government would have increased the 25% relief to 50% relief for the 2011/2012 and 2012/2013 years in light of the shocking investment markets this financial year.

Okay, 50% relief is no longer available but the good news is that you can still take advantage of a certain level of drawdown relief, but just not as much relief as in earlier years. The Federal Government has deemed that you only have to withdraw 75% of the legislated minimum pension payments for the 2011/2012 and 2012/2013 years.

What the modified extension of payment relief means for individuals receiving superannuation income streams, is that for the 2011/2012 and 2012/2013 years, the minimum payment amounts for account-based pensions will be 75% of the normal requirements. For example, an individual aged 65 must withdraw 3.75% of his account balance for the 2011/2012 year, rather than 5% under the regular minimum pension payment rules.

Like previous years, the temporary minimum pension payment relief applies to account-based pensions and annuities (payable since 1 July 2007); and allocated pensions and annuities. This change required amendments to the Superannuation Industry (Supervision) Regulations 1994 and the Retirement Savings Accounts Regulations 1997. The changes have been made for the 2011/2012 and 2012/2013 years.

Note: If you have a market-linked income stream, the calculation for the annual minimum pension payments is different. For the calculation method for market-linked income streams, refer to SIS Regulations, Schedule 6 (specifically clause 11), or chat to your accountant or adviser. Click here to access SIS Regulations Schedule 6.

The minimum pension payments will return to normal from the 2013/2014 financial year, although I hope the Government extends the pension payment relief for several more years to allow account balances to recover from the recent economic uncertainty.

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, and 29 November 2011. Figures for 2011/2012 year and 2012/2013 year calculated by Trish Power.

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 3.75% of your account balance as at 1 July 2011 (for the 2011/2012 year), or as at 1 July 2012 (for the 2012/2013 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 $18,750.

Note: The relevant regulations extending the pension payment relief for the 2011/2012 year, and for the 2012/2013 year, are in place. For verification, see Schedule 7 of the Superannuation Industry (Supervision) Regulations 1994 or Superannuation Industry (Supervision) Amendment Regulations 2011 (No. 1).