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When a retiree commences an account-based pension with their superannuation monies, it pays them an income.   Account-based pensions are required by law to pay a minimum income every year which is referred to as the “minimum drawdown requirement” The Government is temporarily reducing superannuation drawdown minimums for Account-Based Pensions and similar products to 50% of their relevant age based rates for 2019/20 and 2020/21.  This has been put in place to help retirees by providing them with more flexibility around managing their assets and ensuring they don’t have to take out as much money from super when markets are really low. 

Temporary Reduction in Superannuation Minimum Drawdown Requirements 

This measure will benefit retirees with account-based pensions and similar products by reducing the need to sell investment assets to fund minimum drawdown requirements.  The reduction applies for the 2019-20 and 2020-21 income years

Age Default minimum drawdown rates % Reduced by 50% for 2019-20 and 2020-21 years
Under 65 4 2
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 more 14 7

Could this benefit Nancy and Phil?

Due to the recent market fluctuations Nancy and Phil (both retired) find that their account based pension balances have reduced.  Nancy and Phil want to understand whether they should or should not take up the opportunity to reduce the amount being drawn down from their account based pensions.

Let’s take a look                    

Name Nancy and Phil
Age 70 and 72 respectively
Marital Status Married
Employment Both retired

Situation in January 2020

Nancy and Phil were getting a weekly income of $966 from a combination of the age pension and their own account based pensions.  Their financial situation was:

Their Assets

  • Phil holds an account based pension worth $200,000
  • Nancy holds an account based pension worth $85,000
  • They have a bank account with $80,000 in cash
  • They have furniture and one car worth around $20,000
  • They own their home.

Their Expenses

  • Living expenses $7801 p/week 

Total weekly expenses $780

Their Income

  • Their combined income from their account based pension $2742 p/week
  • Their couples age pension entitlement is $6923 p/week

Total weekly income $966 (saving $186 p/w that is used on some luxuries like treating the grandkids, going to the theatre or putting into the bank account)

Situation in March 2020

Their account-based pensions balance dropped by 20%4 due to the fluctuating share market.  After the Centrelink increased the pension rates on 20 March, Nancy and Phil rang Centrelink to reassess their situation and age pension entitlement.  The result is as follows:

Account based combined pension value Weekly income from account based pensions Age pension entitlement Total weekly income
Jan 2020 $285,000 $2742

5% drawdown – ($14,248 per annum)

$6923 $966
Mar 2020 $228,0005 $2742 $7113 $985
Difference $57,000 less in value $19 more

Nancy and Phil will continue to receive the 5% drawdown amount on the initial account based pension value as at the commencement date or 1 July every year going forward.  The result of the decreased value of their account based pension is an increase in age pension.

Could they afford to reduce their account based pension income?

The first thing Nancy and Phil need to consider is, what level of income do they need to live on a week? As determined in their financial situation Nancy and Phil spend $780 per week.

  • They were receiving $966 in January 
  • After the March rate increase and re-assessment they are now receiving  $985.  (this is $205 a week more than their expenses).

Nancy and Phil currently do not need the income they are drawing from their account based pension.  They are either putting the money into their bank account or using it for treats for the grandkids etc so they could afford to reduce the drawdown % to the minimum for the 2020/21 year.  

Nancy and Phil could also speak with their superannuation fund regarding reducing their account based pension payments for the rest of 2019/20 ensuring that they meet the minimum drawdown rate for 2019/20 as at 30 June 2019.

Does reducing their drawdown help?

Withdrawing less out of the Account Based Pension means that Nancy and Phil are taking less of their balance that they don’t need.  Investment markets always fluctuate and when they drop if there is the opportunity to withdraw less of the balance it gives the remaining investment balance time to recover.

Note:

It is definitely worth looking at the current age pension you are receiving and using the eligibility calculator to see if any reduction in your super, account based pension and other investment assets can increase your age pension entitlement. 

Assumptions: 

  1. The weekly living expense was calculated using the maximum ASFA modest lifestyle figure for couples (as at Dec 2019) of $40,560 per annum
  2. The original Account based pension income was calculated using the regulated rate of 5% per annum of the account balance for a 65 – 74 year old.
  3. Age Pension Rates were calculated using the Retirement Essentials Age Pension eligibility calculator as at 25 March 2020. 
  4. The drop in value of the account based pension was 20% as at 25 March 2020.

This article is provided by Retirement Essentials Representative Number: 001260855.  We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859.  This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decision