Jun 2020 5 Minutes
Temporary drawdown reduction for income streams
The Government is temporarily reducing the minimum pension drawdown on super income streams for account-based pensions and similar products (e.g. Allocated Pensions, Market Linked Pensions).
The measure will benefit retirees by reducing the need of potentially having to sell investments to fund their minimum drawdown requirements.
The reduction applies for the 2019-20 and 2020-21 income years.
|Age at 1 July||Standard minimum pension||Reduced minimum pension (50%)|
|65 - 74||5%||2.5%|
|75 - 79||6%||3%|
|80 - 84||7%||3.5%|
|85 - 89||9%||4.5%|
|90 - 94||11%||5.5%|
|95 or older||14%||7%|
To understand how this works, let’s look at the following example:
Bill (64) is drawing an account-based pension from his SMSF. The balance of his pension at 1 July 2019 was $600,000, which requires him to take a minimum drawdown of 4% ($24,000) for the 2019-20 income year.
As a result of the reduced minimum pension measures, this minimum pension for 2019-20 has now reduced by 50%, meaning that Bill is only required to draw down $12,000 before 30 June 2020.
Due to the impact of the coronavirus on financial markets, Bill’s account-based pension balance had declined to $520,000. As a result, his minimum pension for the 2020-21 financial year is calculated to ordinarily be $26,000 (5% as he is now 65 at 1 July 2020), however a 50% temporary reduction will apply, resulting in a minimum of $13,000 to be withdrawn before 30 June 2021.
The result of this change is that Bill will be able to preserve his capital and not be placed into a forced sale position on fund assets whilst still drawing an income stream from his super fund.
Below is a range of frequently asked questions from the current information release by Treasury about the temporary minimum pension reduction.
What if I have already taken more than the reduced minimum pension for 2019-20 income year?
If you have already drawn down an amount equal to or greater than the minimum pension that has previously been calculated for 2019-20, you are not required to take any further benefits before 30 June.
I have taken more than the reduced minimum pension and don’t need this amount – can I deposit it back into my super fund?
No, any excess that you have already taken above the reduced minimum cannot be credited back into your member account, unless you are eligible to do so by way of a contribution.
Any amount that you have taken that is above the reduced minimum for the year will simply be applied towards from your pension balance.
What if I haven’t taken any pension yet for the current financial year?
You will be required to take the reduced minimum pension before 30 June for the pension to continue and where it is a retirement phase income stream be eligible for tax exemption on attributable fund earnings.
What types of income streams do this reduced minimum pension measures apply to?
The measures apply only to accounts-based pensions – that is, account-based pensions, allocated pensions and market linked pensions. If you are currently receiving a defined benefit income stream, such as a lifetime or fixed term complying pension, you are required to still take the same amount for 2019-20 and any indexed pension amount for 2020-21.
What if I need to take more than the reduced minimum pension and I have an accumulation account in addition to my pension due to the transfer balance cap. Is there anything I need to contemplate regarding how benefits are paid to me?
Yes, where you have an accumulation account in addition to your pension(s) – likely created due to the introduction of the $1.6m transfer balance cap, it would be beneficial from a tax perspective to treat any amounts above the minimum pension as a lump sum from an accumulation account as it would improve the fund’s tax exemption percentage for fund earnings (ECPI) for the current and subsequent financial years.
What if I need to take more than the reduced minimum pension for the current and next financial years? Is there anything I need to contemplate regarding how benefits are paid to me?
Potentially. In certain circumstances, it may be beneficial to undertake a partial commutation lump sum from your income stream, rather than treating the ‘above minimum’ amounts as a pension payment.
The reason for this is that it would create a debit against your transfer balance account, which may be beneficial for future amounts to be applied against transfer balance cap (e.g. if you make a downsizer contribution), or to create available cap space should you receive a death benefit from a tax dependent (e.g. spouse) that would exceed your transfer balance cap.
It is important to note that you will need to consider the timing of the transfer balance account reporting (TBAR) lodgment obligations for the fund, based upon it being a quarterly or annual reporter for these events.
If you have any further questions in respect to your particular circumstances from the information provided in this article, please do not hesitate to get in contact with Iggy Moro who will be able to assist you further:
The information contained within this article is provided as an information service only and, therefore, does not constitute, and should not be relied upon as, financial product advice. None of the information provided takes into account your personal objectives, financial situation or needs, and you will need to make your own decision about how to proceed. Alternatively, for financial product advice that takes account of your particular objectives, financial situation or needs, you should consider seeking financial advice from an Australian Financial Services licensee before making a financial decision.