Minimum Pension Drawdown Rates Halved for 2019/2020 & 2020/2021

Minimum Pension Drawdown Rates Halved for 2019/2020 & 2020/2021

Note

On 22 March 2020 the Federal Government announced that the minimum pension drawdown rates would be halved for the 2019/2020 and 2020/2021 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.

Once you retire and reach your preservation age you can start to withdraw your superannuation 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.

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 balance transfer cap of $1.6 million.

Once you start a retirement income stream, minimum annual payments are calculated on your account balance at July 1 each year, multiplied by a percentage factor which increases as you age.

The minimum amounts you can withdraw each financial year are set out in the table below. For example, someone aged 65-74 must withdraw 2.5% of their account balance this financial year. The percentage factor is set according to your age on July 1 in the financial year the pension is to be paid.

Minimum pension payment factors

Age of beneficiaryPercentage factor
(2019/2020 and 2020/2021)
Percentage factor
(2013/2014 to 2018/2019)
Under 652%4%
65 to 742.5%5%
75 to 793%6%
80 to 843.5%7%
85 to 894.5%9%
90 to 945.5%11%
95 or more7%14%

Source: SIS Act

Payments must be received at least annually between July 1 and June 30 each financial year, although many retirees opt to receive monthly or quarterly payments. Annual payment amounts are rounded to the nearest 10 whole dollars. If the amount ends in an exact 5 dollars, it is rounded up to the next whole 10 dollars.

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 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 which 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.

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.

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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 which 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 July 1, 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 June 1, no payment is required to be made in that financial year.

Examples

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 March 1, this is how the minimum amount is calculated for the first financial year.

There are 92 days left in the financial year, from March 1 to June 30, so the minimum withdrawal in the first year is $3,240 rounded to the nearest 10 dollars

92 days is 25.2% of 365 days

643,000 x 25.2% = $162,071.23

$162,071.23 x 4% = $3,241.42, rounded to $3,240.00

Heather opts to receive the minimum amount in three monthly payments of $1,080.

Hugh, 81, has an account-based pension with a balance of $1,010,100.

$1,010,100 x 3.5% = $35,353.50, rounded to $35,350.00

Hugh withdraws the minimum $35,350 each year, which he receives in monthly payments of $2,945.83.

How are super pensions taxed?

Provided your super pension complies with the annual minimum payment requirements, there is no tax payable on either the income you receive or earnings (including capital gains) on the investments supporting the pension.

 However, if you fail to withdraw the required minimum, pension income and assets will lose their tax-free status for the full financial year and all withdrawals will be treated as lump sums. Lump sums generally include taxed and tax-free components.

If you fail to make the minimum payments one year but comply the following year, the tax benefits will be reinstated but you will need to start a new pension.  To start a new pension, the fund trustee will need to revalue pension assets at market value and recalculate the minimum pension payment.

The Tax Commissioner may show leniency and allow an income stream to continue if certain conditions are met. If the failure to pay the minimum pension amount was an honest mistake resulting in a small underpayment, or outside the control of the trustee, and a catch-up payment is made within 28 days of becoming aware of the oversight, the income stream may continue without needing to be restarted. If the income stream was in retirement phase, there will be no loss of tax exemptions for the year the oversight occurred. A small underpayment is deemed to be not more than one twelfth of the annual minimum.

If you have an SMSF paying more than one pension, both need to meet the minimum payment requirements. If one pension complies and the other fails to pay the annual minimum amount, only that one will need to apply for leniency or lose its tax exemptions.

The taxation of Transition to Retirement (TTR) pensions is a little different. Since 1 July 2017, if your TTR pension is not in retirement phase then earnings on assets supporting the pension are taxed at 15%. Income remains tax-free.

Retirement phase (previously called pension phase) refers to the period when a super fund pays a super income stream, and the earnings on those pension assets are tax-free.

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If your TTR pension pays out less than the annual minimum then the above exceptions may apply, but there are no exceptions if pays more than the maximum payment which is 10% of the fund balance.

Pension strategies to reduce tax

In some cases, there may be tax benefits in the timing and amount of pension income and lump sum withdrawals in pension phase.

This is especially so for SMSFs since the changes to the tax exempt (Exempt Current Pension Income, or ECPI) rules, where at least one fund member has an amount in retirement phase that is being drawn as an income stream and an amount in accumulation phase.

Strategy 1

Graeme Colley, Executive Manager, SMSF Technical Support and Training at SuperConcepts says that for someone withdrawing more than the minimum pension amount, there can be a tax benefit in taking additional amounts as a lump sum from their accumulation account early in the financial year. That’s because income from the accumulation account is taxed by up to 15% whereas income from the pension account in retirement phase is tax-free. By reducing the balance in the accumulation fund you effectively increase the tax-exempt proportion of your fund.

Colley gives the example of Liam, 62, who is the only member of his SMSF. He is drawing an account-based pension with a balance of $1.6 million on 1 July 2018 and had an accumulation account of $400,000 at that time. That is, the total balance of his fund is $2 million, the tax-exempt portion is 80% (1.6 million as a percentage of 2.0 million) and the taxable portion is 20% (400,000 as a percentage of 2.0 million).

Liam wants to withdraw $80,000 from super in the 2018-19 financial year to meet his living expenses. The minimum pension he is required to take is $64,000, which means he will need to withdraw an additional $16,000 to meet his expected living costs.

Liam could withdraw the full $80,000 from his pension account or take $16,000 as a lump sum, either before or after the pension. Depending on how he withdraws the amounts the fund will end up with different tax-exempt percentages. If he takes it all as a pension monthly through the year the tax-exempt amount would be 79.588% as he progressively reduces the tax-free portion of the fund’s taxable income from the original 80% at the start of the year.

The best outcome is where he takes the lump sum of $16,000 on 1 July and takes the pension payment the following 30 June, resulting in a tax-exempt portion of 80.643%. By taking the lump sum from his taxable accumulation account as early as possible, he has reduced the taxable proportion of his fund. And by drawing a pension from his pension account as late as possible, he maximises the tax-exempt portion of his fund.

Strategy 2

In some cases, Colley says it may make sense to stop a pension, add money to maximise the $1.6 million cap, and restart the pension on the same day.

He gives the example of Haley, 60, who commences an account-based pension with $1.6 million and the income in the fund is all tax free. She wants to withdraw $100,000 each year for the next five years, which is more than her $64,000 minimum pension amount. The best strategy would be to withdraw the $64,000 as a pension and the remaining $36,000 as a lump sum by commuting (stopping) the pension. The commutation would reduce the amount counted against her balance transfer cap and allow her to commence a pension at a later date with the cap space that becomes available. By structuring withdrawals so her total superannuation balance is reduced, she can make non-concessional contributions in the next financial year if she wishes.

Strategy 3

Another strategy worth considering is the timing of asset sales to maximise tax exempt income. Where a fund is wholly in pension phase for part of the year when it is 100% tax exempt, and wholly in accumulation phase for another part of the year with 0% tax exemption, it makes sense to sell assets when the tax-exempt portion is the highest.

Taken From: https://www.superguide.com.au/accessing-superannuation/minimum-pension-payments-reduced