Changes to Minimum Pension Drawdown Rates

The Federal Government has announced that the minimum pension drawdown rates will be temporarily halved for the 2019/2020 and 2020/2021 financial years. This change will provide greater flexibility for retirees who do not wish to sell their investment assets during this time, when the value of those assets is reduced.

From 1 July 2020, if you have elected the minimum pension payment rate your payments will automatically reduce to the new lower rate (please refer to the below table). If you do not want to receive the reduced rate, you will need to submit a request to change your pension payment amount. You can do this one of the following ways:

  • Pension payment election form – Complete and return to us
  • MemberAccess – Amend your payment preference via withdrawals on your online account
  • Letter – Scan & email a letter including the date, member number, full name, DOB, payment amount (before tax) or percentage (%), payment frequency and your signature.

You will need to submit your request 2 weeks prior to your payment date.

 

Does this apply to you?

If you have retired from paid work and have an account-based pension, this temporary reduction in pension drawdown rates are an option that you may want to consider. The legislation, which passed on 24th March 2020, includes allocated pensions and market-linked pensions (also called term allocated pensions), as well as transition to retirement pensions.

Defined benefit pensions, such as lifetime or life expectancy products, are not included in the legislation change.

New minimum pension payment rates

Age of beneficiary Reduced minimum drawdown rates for
(2019/2020 and 2020/2021)
Default minimum drawdown rate (%)
Under 65 2% 4%
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%

 

EXAMPLE
Hazel is a 66-year-old retiree with a super account-based pension.

The value of Hazel’s account-based pension at 1 July 2019 was $200,000. Under current minimum drawdown requirements, Hazel is required by legislation to drawdown 5 per cent of her account balance over the course of the 2019-20 and 2020-21 income years.

This means Hazel has to drawdown $10,000 by 30 June 2020 to comply with the minimum drawdown requirements.

Following the temporary reduction in minimum drawdown requirements, Hazel will now only be required to drawdown 2.5 per cent of her account balance, that is, $5,000, by 30 June 2020. If Hazel has already withdrawn over $5,000 for 2019-20, she is not able to put the amount above $5,000 back into her super account.

On 1 July 2020 the value of Hazel’s account-based pension is $180,000 (after drawdowns and investment losses). During 2020-21, Hazel is required to drawdown 2.5 per cent of her account balance, which is $4,500, instead of $9,000.

As a result of this change to minimum drawdown requirements, Hazel is able to preserve her capital while still drawing an income from her super.

Why does the government set a minimum payment?

Super, and the tax concessions it receives, is designed to provide income during retirement. It is to be used as a tax-effective way to transfer wealth to the others. The Federal Government sets minimum annual payments to satisfy the “sole purpose test” for super accounts.

The temporarily reduced percentage factor – beginning at 2% and rising to 7% as you age – is considered a safe amount for retirees to withdraw each year while maintaining an account balance that will keep the income flowing through retirement.

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,
  • 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 which is not in retirement phase, in which case the maximum amount is 10% of your pension account balance.

 

What this means for you

If you are an eligible retiree, with enough finances to during this period of market volatility, you may be able to avoid selling shares, property or other assets into a falling market.

Conversely, 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.

 

Will the reduced drawdown rates be applied automatically?

2019/2020 financial year
No, existing members who have nominated the minimum payment for this financial year will not automatically be reduced to the new minimum rates for the remainder of 2019/2020.

2020/2021 financial year
Yes, existing members who have nominated the minimum payment for 2019/2020 will automatically receive the new reduced minimum rates for 2020/2021 unless you have submitted a request to change your level of income.

If you have nominated the minimum payment for 2019/2020 and do not wish to reduce this amount in 2020/21, you will need to submit a request stating the percentage (%) you would like to receive in 2020/21.

 

How do I request any changes to drawdown rates?

The process for changing your pension amount will remain the same:

  • Complete the form you receive on an annual basis; or
  • Scan and email a letter to members@christiansuper.com.au which includes the following details:
    • Date
    • Member number
    • Full name
    • Date of birth
    • Please reduce my pension payments to X%
    • Your signature

Changes to social security deeming rates

The Government is also reducing both the upper and lower social security deeming rates by a further 0.25 percentage points in addition to the 0.5 percentage point reduction to both rates, as announced on 12 March 2020.

The changes to deeming rates will be effective from 1 May 2020 and will mean an upper deeming rate of 2.25 per cent and the lower deeming rate set at 0.25 per cent.

 

Need help?

The temporary halving of the minimum pension drawdown rates gives more flexibility to retirees with account-based super pensions. Our Member Care Team is here to help you with questions you may have about your account.

Phone: 1300 360 907
9:00am – 6:00pm (AEDT) Monday to Friday

Email: members@christiansuper.com.au

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Please note that the information contained in this post is a summary and general in nature. It does not take into account the personal objectives, financial situation or specific needs of individual members. We strongly recommend that you refer to our Product Disclosure Statement (PDS) and Investment Guide for the full terms and conditions and obtain professional financial advice to determine the appropriateness of the information, taking into account your own personal circumstances.