Minimum pension drawdown rates halved for 2019/20 and 2020/21
On 22 March 2020 the federal government announced that the minimum pension drawdown rates would be temporarily halved for the 2019/20 and 2020/21 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.
Retirees and their advocates had been calling for such a measure, pointing to a similar reduction in the wake of the GFC. Back then, minimum payment amounts were halved for 2008/09, 2009/10 and 2010/11, then reduced by 25% for 2011/12 and 2012/13.
Who will benefit?
The temporary reduction in pension drawdown rates (see table below) will benefit retirees with account-based pensions and similar products. Lyn Formica, head of technical and education services at SMSF specialist Heffron said the legislation passed on 24 March made it clear that this includes allocated pensions and market-linked pensions (also called term allocated pensions), as well as transition to retirement pensions. Not included are defined benefit pensions such as lifetime or life expectancy products.
The upshot is that eligible retirees with enough cash flow to ride out this period of extreme market volatility will not be forced to sell shares, property or other assets into a falling market simply to comply with the usual minimum drawdown amounts. By preserving more of their capital, they will have more money working for them to capture the market upswing when it inevitably occurs.
CASE STUDY
Mike is a 66-year-old retiree with $200,000 in a super account-based pension at 1 July 2019. Previously, Mike was required to draw down 5% of his account balance over the course of 2019/20 and 2020/21. This meant he had to withdraw $10,000 by 30 June 2020.
Following the temporary reduction in minimum drawdown rates, Mike will now only be required to withdraw 2.5% of his account balance, that’s $5,000, by 30 June 2020. If he has already withdrawn more than $5,000, he is not able to put the amount above $5,000 back into his super account.
On 1 July 2020 the balance of Mike’s super pension is $180,000 after drawdowns and investment losses. During 2020/21, Mike is required to draw down 2.5% of his account balance, which is $4,500 instead of $9,000.
Source: Australian Government
Unfortunately, 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.
