Minimum pension withdrawals are a fairly straightforward aspect of moving from the saving to spending phase of retirement. Or they should be. But in recent adviser consultations, Retirement Essentials members have revealed a degree of concern and confusion about what is usually their main income stream. Today we explain how these withdrawals work, what the government requires you to do – and some of the options you have to maximise your overall income. You may be surprised at the flexibility you have and how, by reviewing your drawdown settings, you can improve your overall financial outcome.
Let’s start with the ‘what’…
What are minimum drawdown rates?
When you reach Preservation Age, you are able to access your super. The majority of Australians will do so by ‘rolling’ all or part of their savings into an Account-Based Pensions (ABP). This decumulation account pays no tax. But regardless of whether you are paying yourself from an ABP or your own Self-Managed Super fund (SMSF) you are required by the government to withdraw a minimum amount every year. The rate depends upon your age. Here are the current designated amounts:
| Age on 1 July | Minimum drawdown rates from 1 July 2023 (still current) % of your super balance |
| 60-64 | 4% |
| 65-74 | 5% |
| 75-79 | 6% |
| 80-84 | 7% |
| 85-89 | 9% |
| 90-94 | 11% |
| 95 or over | 14% |
Why do you have to withdraw a specific amount?
Because you are holding money in an account with tax benefits (i.e. the earnings are tax-free), the government requires that these retirement savings are being used to actually fund your retirement. By forcing retirees to withdraw a modest amount, it also means (in theory) that someone’s total super balance won’t be used as a bequest to family members.
What happens if you fail to withdraw the minimum amount?
According to the ATO, ‘if you do not make the minimum payment in an income year, the pension will be treated as having ceased at the start of that income year for tax purposes (unless an exception applies)’ – and therefore your tax-free status ceases.
Do these amounts change every year?
No, with the exception of the years during the Covid pandemic (when withdrawals were halved), these percentages remain stable. What does change is your age – you will note that the rates are grouped into five or 10 year increments, so when you reach a higher age (say 65, 75 or 80) your compulsory rate of withdrawal will move up a percent or two. Many super funds will automatically make these adjustments to your ABP on your behalf, but the onus is on you to check that you are complying with this rule.
Are there restrictions on what you do with this money?
No, none at all.
You can spend it all, gift it or put it back into an accumulation account. But beware, there are traps associated with each of these three actions.
What if I spend it all?
In the early years when withdrawal rates a low (4% for age 60-64) you may find that your super balance is actually growing as there is a good chance your earnings could be above 4%. That’s based on a good year for returns, though, so in a year of low returns, you may find you are starting to eat into your capital. It is important that whatever your minimum withdrawal rate is, you have a clear idea of the long-term effects of this rate of spending on your savings.
What if I gift it?
Not everyone needs all of their particular minimum withdrawal amount to cover household expenses. This means that they might wish to gift the excess and it could be considered a financial asset by Centrelink depending upon when and how much is handed over. Fully understanding how gifting rules work is important if this is something you wish to do with your retirement income.
Can I really reinvest it in super?
This is a little known aspect of super withdrawals. For those under 75, you can, at any time, recontribute this money to super. It will need to go into an accumulation account (existing or new) and will be taxed accordingly. See how this worked really well for one couple recently.
What if I’m over 75?
Rules are different for those aged 75 and over. At this age you cannot contribute to super unless it is a compulsory employer contribution (i.e. from work income) or as a Downsizer Contribution, which requires the sale of your primary residence.
How do I ensure my rate of spending is just right?
Getting your spending right is perhaps the ultimate retirement income skill. It’s not a one-off decision – far from it. You may find that the minimum withdrawal is not enough to live on. You may find it’s too much. The best way to make decisions about pension withdrawals is a three step process:
- Establish your Age Pension eligibility (full, part or not eligible). Based upon these likely Age Pension benefits, establish the super top-up amount which you will need to cover household costs and allow for desired lifestyle in retirement. Your other savings or private investments should also be factored in here.
- Project how sustainable this level of super withdrawal will be across your likely lifespan
What else do I need to think about?
The above three-step calculations will also need to be adjusted for likely earnings on your super savings, inflation and any Age Pension increases. These factors are all included in the Retirement Forecaster calculations to provide reliable answers to your income projection questions. Alternatively, you may wish to learn more about super and how it can work best for you.
You can read more on this topic here.
Are you comfortable that you are withdrawing at the most appropriate rate?
Or is there something else about minimum withdrawals that we didn’t cover?
