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On 22 March 2020 the federal government announced that the minimum pension drawdown rates would be temporarily halve for the 2019/20 and 2020/21 financial years. This is due to many retirees losing a significant portion of their super account balance as sharemarkets have plunged due to the coronavirus crisis. This rule change assists retirees who do not wish to sell their investment assets while the value of those assets is reduced.
Retirees and their advocates had been calling for such a measure, pointing to a similar reduction in the wake of the GFC. Back then, minimum payment amounts were halved for 2008/09, 2009/10 and 2010/11, then reduced by 25% for 2011/12 and 2012/13.
Who will benefit?
The temporary reduction in pension drawdown rates (see table below) will benefit retirees with account-based pensions and similar products. Lyn Formica, head of technical and education services at SMSF specialist Heffron said the legislation passed on 24 March made it clear that this includes allocated pensions and market-linked pensions (also called term allocated pensions), as well as transition to retirement pensions. Not included are defined benefit pensions such as lifetime or life expectancy products.
The upshot is that eligible retirees with enough cash flow to ride out this period of extreme market volatility will not be forced to sell shares, property or other assets into a falling market simply to comply with the usual minimum drawdown amounts. By preserving more of their capital, they will have more money working for them to capture the market upswing when it inevitably occurs.
Mike is a 66-year-old retiree with $200,000 in a super account-based pension at 1 July 2019. Previously, Mike was required to draw down 5% of his account balance over the course of 2019/20 and 2020/21. This meant he had to withdraw $10,000 by 30 June 2020.
Following the temporary reduction in minimum drawdown rates, Mike will now only be required to withdraw 2.5% of his account balance, that’s $5,000, by 30 June 2020. If he has already withdrawn more than $5,000, he is not able to put the amount above $5,000 back into his super account.
On 1 July 2020 the balance of Mike’s super pension is $180,000 after drawdowns and investment losses. During 2020/21, Mike is required to draw down 2.5% of his account balance, which is $4,500 instead of $9,000.
Source: Australian Government
Unfortunately, retirees with low super pension account balances may find they need to withdraw more than the temporarily reduced minimum amount to cover their living expenses.
Starting a super pension
Once you retire and reach your preservation age you can start to withdraw your super as an income stream, a lump sum or both. Most retirees choose to take at least part of their super as an income stream because it provides them with regular tax-free payments until their money runs out.
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A super income stream, also called a super pension or annuity, simply refers to regular periodic payments you receive from your super fund once you retire or satisfy a condition of release.
To start a super income stream, you need to transfer money from your super accumulation account into a retirement account up to the transfer balance cap of $1.6 million.
Once you start a retirement income stream, minimum annual payments are calculated on your account balance at 1 July each year, multiplied by a percentage factor that increases as you age.
The minimum amounts you can withdraw each financial year under the temporary arrangements are set out in the table below, alongside the previous rates. For example, someone aged 65–74 must withdraw 2.5% of their account balance this financial year (previously they had to withdraw 5%). The percentage factor is set according to your age on 1 July in the financial year the pension is to be paid.
Minimum pension payment rates
On 22 March 2020 the federal government announced that the minimum pension drawdown rates would be halved for the 2019/20 and 2020/21 financial years. The rates below show the temporary rates for 2019/20 and 2020/21, and the normal rates for preceding years.
|Age of beneficiary||Temporary percentage factor|
(2019/20 and 2020/21)
|Normal percentage factor|
(2013/14 to 2018/19)
|65 to 74||2.5%||5%|
|75 to 79||3%||6%|
|80 to 84||3.5%||7%|
|85 to 89||4.5%||9%|
|90 to 94||5.5%||11%|
|95 or more||7%||14%|
Source: SIS Act
Payments must be received at least annually between 1 July and 30 June each financial year, although many retirees opt to receive monthly or quarterly payments. Annual payment amounts are rounded to the nearest ten whole dollars. If the amount ends in an exact five dollars, it is rounded up to the next whole ten dollars.
Minimum pension payment calculator
Our calculator below gives you an estimation of your minimum pension payment amount.
Enter your age and pension balance in the yellow fields as at 1 July and the calculator will display your annual minimum pension payment amount for that financial year (1 July to 30 June).
The results of this calculator are indicative only and do not constitute financial advice. We recommend that you check your minimum pension payment amounts with your financial adviser, accountant, super fund or the ATO.
What is an account-based pension?
Most super pensions these days are account-based (also called allocated pensions), so called because the pension is paid from a super account held in your name.
For SMSFs with account-based pensions, the amount supporting the pension must be allocated to a separate account for each member.
However, some government defined benefit super schemes or annuities paid by life insurance companies offer non-account-based pensions where you agree that your fund will pay you a regular income over a set period of time, usually guaranteed for life or a fixed term. Unlike account-based pensions, the income stream does not have an identifiable account balance in the member’s name.
There is still a minimum annual withdrawal that is worked out by multiplying the purchase price of the income stream by your age-based percentage factor. In the first year you take the member’s age at the start of the income stream. In subsequent years, you take the member’s age on each anniversary of the start day. These pensions are not affected by the temporary reduction in minimum drawdown rates.
Why does the government set a minimum payment?
The reason for setting minimum annual payments is to satisfy the sole purpose test. That is, that superannuation, and the generous tax concessions it receives, is designed to provide retirement income. It’s not designed as a tax-effective way to transfer wealth to the next generation.
The percentage factor – beginning at 2% and rising to 7% as you age – is generally considered a safe amount for retirees to withdraw annually while maintaining an account balance that will keep the income flowing through retirement. As it’s impossible to know how long any individual will live, these amounts are based on the average lifespan for Australians who reach age 65, 75, 80, 85, 90 and 95.
Your super income stream will stop:
- When there’s no money left in the account
- No minimum payment is made
- It is commuted (converted) into a lump sum
- When you die, unless you have a dependent beneficiary who is automatically entitled to receive the income stream.
There is no maximum annual drawdown other than the balance of your account, unless it is a Transition to Retirement (TTR) Pension that is not in retirement phase, in which case the maximum amount is 10% of your pension account balance.
Calculating the first payment
If you start a super pension after 1 July, the minimum amount for the first year is calculated on a pro rata basis according to the number of days remaining in the financial year, including the start day (see Example 1 below).
If your super pension commences on or after 1 June, no payment is required to be made in that financial year.
Heather, 64, has an account-based pension with a balance of $643,000. As this is the first year of her pension, which she started on 1 March 2020, this is how the minimum amount is calculated for the first financial year.
There are 122 days left in the financial year, from 1 March to 30 June, so the minimum withdrawal in the first year is $4,300 rounded to the nearest ten dollars, calculated as follows:
122 days is 33.4% of 365 days
$643,000 x 33.4% = $214,920.55
$214,920.55 x 2% = $4,298.41, rounded to $4,300.00 (instead of $8,600.00 under the usual (4%) drawdown rules)
Heather opts to receive the minimum amount in three monthly payments of $1,433.33.
Hugh, 81, has an account-based pension with a balance of $1,010,100 at 1 July 2019.
$1,010,100 x 3.5% = $35,353.50, rounded to $35,350.00 (instead of $70,710.00 under the usual drawdown rules)
Hugh withdraws the minimum $35,350 for the year under the temporary rules. However, if he had already withdrawn more than this amount before the temporary drawdown rules came into force, he will not be able to put any amount above $35,350 back into his super. He would not be required to withdraw any further amounts in 2019/20 if he chose not to.
The government’s temporary halving of the minimum pension drawdown rates will give retirees with account-based super pensions and similar products more flexibility in the management of their pension assets while investment markets remain volatile. Eligible retirees may benefit from seeking independent financial advice to determine the best pension strategy for their circumstances.
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