Retirees have until June 2022 to make hay while the minimum pension drawdowns are reduced

24 June 2021

In response to the COVID19 pandemic and impact on global economies, the Australian Government announced the reduction of the superannuation minimum drawdown rate by 50% for the 2019-20 and 2020-21 financial years, ending 30 June 2021.

In May 2021, the Government extended this stimulus offering for a further 12 months to 30 June 2022 providing retirees with greater flexibility to fund their retirements and lowering the chances of longevity risk (where a person’s life expectancy exceeds when their capital ends).

Generally speaking, superannuation is an investment vehicle used to fund a person’s retirement. By making periodical contributions, whether they be employer or voluntary, a person can accumulate wealth over a period of time by investing in income receiving and growth-based assets, all while benefiting from compounding interest.

Once a person reaches their Preservation Age, they can begin drawing down on their accumulated superannuation benefits via a pension income stream. This can be received in increments or as an annual one-off payment. This event is usually triggered by either a person transitioning to retirement or their full retirement and is designed to subsidise the loss of wages.

Pension income streams provide many benefits, including:

  • Providing a regular income.
  • Retaining access to all funds (lump sum withdrawals).
  • No tax payable on pension payments from age 60.
  • No tax payable on investment earnings.
  • Any investment earnings are added to the pension account’s balance.

However, one of the main drawbacks of a Pension is that you are required to draw a minimum pension payment (%), which has been calculated by the government based on your age, irrespective of whether or not you require the funds.

Pre-COVID19, the minimum pension drawdowns were:

Age

Minimum Pension Drawdown

Under 65

4.00%

65-74

5.00%

75-79

6.00%

80-84

7.00%

85-89

9.00%

90-94

11.00%

95 and over

14.00%

Due to Covid-19, the legislated temporary reduction to the minimum pension rates as detailed below, has been extended to 30 June 2022.

Age

Minimum Pension Drawdown

Under 65

2.00%

65-74

2.50%

75-79

3.00%

80-84

3.50%

85-89

4.50%

90-94

5.50%

95 and over

7.00%

The reduced Minimum Pension Drawdown option should provide retirees with additional flexibility. Where an eligible retiree has access to sufficient cash flow to withstand periods of negative market volatility, they will not be forced to sell shares, property, or other assets in a falling market simply to comply with the usual minimum drawdown amounts. By preserving more capital, a person will have more funds within their pension income stream to help ensure additional returns during market upswings.

As the rules and legislation surrounding superannuation become ever-increasingly complicated, the need for constant monitoring and reviewing of your personal circumstances has never been greater.

For further information or advice on your superannuation, speak to your adviser or get in touch with the Findex Wealth Management team, who can advise the most appropriate solutions tailored to your individual needs and circumstances.