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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.
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.
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.
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.
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.
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.
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.
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.
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.