Planning your account-based pension withdrawals for the new financial year

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Are my payments sustainable?
Take the time to review your investment strategy
Options if the minimum is more than you would like to withdraw
When can I adjust my super pension payments?
How changing your super pension payment affects Age Pension
The bottom line

If you have an account-based pension, the new financial year presents an opportunity to review your payments, as a new minimum withdrawal will be calculated.

It’s a time to think about whether you’re happy with your current income or would prefer to withdraw a larger amount and enjoy a more comfortable lifestyle.

Alternatively, perhaps you’re concerned about whether your current payments will exhaust your savings too quickly. If you’ve been withdrawing more than the minimum amount, you might consider reducing it.

You may also find you must increase your payments to comply with minimum withdrawal requirements. Perhaps you have had a milestone birthday that triggers an increase in your minimum pension payments, and the removal of the government’s temporary halving of the usual minimum will also have an impact.

Learn more about minimum withdrawals.

Are my payments sustainable?

When you’re no longer earning income from work it can be natural to worry about whether the savings you have will last for life.

Interestingly, recent research commissioned by the Financial Services Council estimated that retirees could draw 15–20% higher payments than are currently typical if they are prepared to consume their super balance in retirement. This may indicate that retirees are being too conservative with their withdrawals and could afford to enjoy a better retirement lifestyle without running out of savings.

In Australia we also have an important safety net provided by the Age Pension. If your savings reduce as you age, the Age Pension may step in to fill the gap, so long as you meet residency and other requirements.

Learn more about Age Pension eligibility.

Income and assets tests mean that more Age Pension becomes payable as personal savings decline, so you can often maintain the same total income while drawing a lower amount from your super pension as you age.

To investigate how sustainable your payments are, you may wish to do some modelling. ASIC’s Moneysmart website provides a simple account-based pension calculator that estimates how long your super pension income will last. Unfortunately, it does not consider Age Pension or allow you to vary the modelled withdrawal over time. This calculator assumes you will withdraw the same dollar figure, indexed for inflation, until your balance is exhausted.

If the Moneysmart calculator doesn’t reflect your plans, it’s worth approaching your super fund to find out if they provide a more comprehensive calculator for members or if they can provide you with some modelling through their financial advice services.

If you have a self-managed super fund (SMSF) and use a financial adviser, they could help.

Learn more about safe withdrawal rates.

Take the time to review your investment strategy

If you’re considering changes to your annual payments, it’s sensible to also review your investment strategy. Typically, money that is set to be withdrawn in the short term would be invested more conservatively than funds that will remain invested long term.

Case study: Yumiko

Yumiko will be 75 on 1 July 2023. Her annual minimum withdrawal will increase from 2.5% to 6% of her balance due to the end of the temporary reduction in minimum withdrawals and her 75^th birthday.

Currently Yumiko has 10% of her super pension invested in cash for short-term needs. She retains the remainder in a balanced portfolio.

Yumiko wants to make sure she has enough for three years of payments retained in stable assets, so she decides to redistribute her account to invest 18% of the balance in cash. She will withdraw all her pension payments from the cash portfolio, leaving her balanced investment to grow.

Yumiko is following a simple bucket strategy for her investments.

Learn more about the bucket strategy.

Options if the minimum is more than you would like to withdraw

If you’re finding your payments are too high, but can’t reduce them due to the minimum requirements, there are options available.

If you’re under 75, you can consider reinvesting the pension payments you don’t need in a super accumulation account. If your total super balance is under the transfer balance cap (currently $1.7 million and increasing to $1.9 million from 1 July 2023), you can make non-concessional contributions until you turn 75. There is no longer any need to meet a work test to make this type of contribution.

If you can’t make super contributions, but want to retain money in the super system, you might consider commuting your pension to the accumulation phase and starting a new pension with a lower balance. A pension with a lower balance also has a lower minimum withdrawal.

Need to know: If your account-based super pension pre-dates 1 January 2015 and you’re receiving Age Pension or other Centrelink income support, it is important to seek advice before making a full or partial commutation. These actions could reduce your Age Pension entitlement.

When can I adjust my super pension payments?

Many people take the opportunity to adjust pension payments in July when the new year’s minimum is calculated, but this is not the only option.

Generally, you can change the amount of your payment at any time, so long as the minimum annual withdrawal requirements are met. If you find yourself wanting to make changes part way through the year, simply log on to your fund’s online member portal or contact them to update your payment amount.

How changing your super pension payment affects Age Pension

If you’re receiving the government Age Pension, you’re probably wondering how changing your super pension payment will affect it.

The answer depends on how Centrelink assess income from your super.

If you opened your account-based super pension on or after 1 January 2015

Centrelink use deeming rates to calculate income. The actual income you withdraw is not considered in the test. Changing your super pension payments does not immediately have any effect on your Age Pension entitlement.

Learn more about deeming and the Age Pension.

Over time, changing your super pension payments can have an effect because of the impact it has on the balance of your account, which Centrelink uses to calculate your deemed income and include in the assets test.

If your super balance reduces more quickly because you’re drawing larger payments, the income and assets assessed by Centrelink will also reduce more quickly and your Age Pension payment may increase.

Conversely, if your balance reduces more slowly (or increases) because you have lowered your payments then the income and assets assessed by Centrelink will also reduce more slowly or increase. This could reduce your Age Pension entitlement.

Case study: Greg

Greg is single and opened his super pension in 2018. His current balance is $500,000.

He is drawing an annual payment of $30,000 from the super pension. The income assessed by Centrelink is $10,122 – calculated using deeming rates. Greg’s actual income payment of $30,000 is not counted.

His current Age Pension is $404 per fortnight ($10,504 per year) and is determined by the assets test.

Greg feels that his income is not enough for his needs, so he chooses to increase his annual super pension payment to $40,000. This has no immediate effect on his Age Pension – the payment continues at the same level.

After a year, the balance of the super pension has reduced to $485,000 due to withdrawals and investment returns. Greg’s Age Pension increases to $449 per fortnight ($11,674 per year) due to the reduction in the assets used to calculate his entitlement.

If you opened your account-based super pension before 1 January 2015

Centrelink will use deeming (see above) or the deductible amount method to assess income from your super pension, depending on your personal circumstances.

To be eligible for the deductible amount method, you must have been continuously receiving an income support payment from Centrelink since 1 January 2015. If this condition is not met, the deeming method is used.

If Centrelink assess income from your super pension using the deductible amount method, changing your payments may immediately impact your Age Pension entitlement.

Case study: Eleni

Eleni has a defined benefit pension from her time in the public service and an account-based pension. She is single.

Her defined benefit pension pays $12,000 per year. This income stream does not count in the assets test, but all the income is included in the income test.

The deductible amount for her super pension is $15,000 and it has a balance of $290,000. Eleni draws $15,000 from this pension each year. To calculate assessable income, Centrelink subtracts the deductible amount from the annual payment. As the result of this calculation is zero, Eleni does not currently have any income assessed from her super pension.

Eleni’s Age Pension is determined by the income test, and she receives $928 per fortnight ($24,128 per year). Her total current income is $51,128 per year, made up of her defined benefit pension, account-based pension and Age Pension.

If Eleni increases her annual payment from the account-based pension by $5,000 per year her Age Pension will reduce by $2,500 per year. By drawing an additional $5,000, her total income will rise by only $2,500.

If Eleni requires additional income, she may be better off drawing it from her super pension as a lump sum. This will not be assessed in the income test but will slightly reduce her deductible amount in future. Seeking advice from Centrelink or a financial planner would be beneficial.

The bottom line

The coming of a new financial year is a good time to take stock of your account-based pension payments and make any desired adjustment. You may also like to do this at other times, and account-based pensions are flexible enough to accommodate changes whenever you decide to make them.

Account-based pension rules for retirees only specify a minimum annual withdrawal – there is no maximum. So long as you withdraw at least the minimum, the sky is the limit! Of course, the more you withdraw, the more quickly your balance will be depleted.

Help is available to model the impact of changing payments, and you may be able to withdraw more than you think without risking the sustainability of your income.

If you’ll be changing your payments, it is important to review your investment strategy and consider the potential impact on any Age Pension you are receiving.