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?
I look forward to every Tuesday morning to read your advice.
Husband and I are both 61, I’m no longer work, husband is leaving work December 2024.. Do we have to start withdrawing 4% from our superannuation while he’s still working? We will be self funded until 67.
Hi Julie, thank you for the compliment! You do not have to start withdrawing, the choice is yours. We can help you understand your options and each of their pros/cons via one of our consultations that you can book HERE.
If I have not yet retired but am receiving a small amount from the OAP do I still have to draw down a minimum amount?
I don’t take a pension from my super. I only have a small balance and I haven’t withdrawn for about 2 years in the hope that it will increase (it has). I supplement the full age pension from other savings. Do I have to withdraw the minimum? It would be 5% as I’m 69. Or are you only required to do this if you take a pension from it?
Hi Robyn, you are only required to make mandatory reductions if in pension mode, whilst in accumulation there is no requirement.
I have recently retired, and receive a full pension, and $900 P.F. from a Choice income account having converted my super. The Choice income account holds around $240,000. My wife, who is under pension age, receives $600 P.F. in newstart allowance, and has no super.
I am concerned that I am over this or that threshold, and will face a tax burden come the end of the next fiscal year.
How exactly, do I calculate whether I am within the limits ?
Hi Lance, you can review the thresholds and compare your situation against them via THIS LINK.
I’m 72 and with some wise investment i.e. with my ABF changing plans during the financial year. I could well be in profit after taking my compulsory 5% draw down (take this once a year in Dec. For Christmas) my question is will I pay Tax on it.
Hi John, I recommend you speak with a tax agent to be certain.
My wife and I are under PR status and have to wait for 10 years before we qualify for age pension. We are competing 7 years and have to wait for 3 more years before we become eligible.
Will contact you nearer time
Thanks.
Emmanuel Thompson
We have a SMSF, corporate type. I am 72 and wife is 77. If one passes away the super will transfer to the survivor tax free. There are various ABP ‘s for each of us with 99% of them 100% tax free. We have set up a testamentary trust for our 4 adult children. If the sole survivor passes away before withdrawing all of the super, what tax would be paid by the beneficiaries, and is any tax paid on the earnings that have accumulated over the years?
eg. there is $50000 remaining in account ABP 001 and over the years there has been earnings of $20000, is there a tax for the beneficiaries on both the $50000 and also the $20000?
Hi Ray, I recommend you seek clarity from a tax agent who will know exactly how it works.
As retirement may last more than 20 years, I still have some of my super invested in a high growth option (in fact, one of my industry super fund’s sustainable options). However, most of my super is invested in the (sustainable) balanced option with less risk of larger losses if investments are affected by a downturn like the GFC.
I take the minimum income (at 73 years that’s 5%), and if necessary make a lump sum withdrawal from super if our part aged pension and super pension don’t cover extra expenses.
I appreciate that people are nervous about riskier investments during retirement/in the pension phase of their super drawdown, but I also think it’s worth considering strategies that see some of one’s balance invested in higher earning options, understanding of course, these may incur higher losses at times.
Level of risk can gradually be decreased over time, as years to recover potential losses become fewer as we age; but using a strategy of higher risk with some of my balance, sees my balance grow during good years, despite taking the required amount of super pension and sometimes a lump sum. By contrast, a person with a 100% conservative investment approach throughout their lengthy retirement, would mostly see an ever declining balance.
I review the percentages of my balance invested in each option annually and if necessary, reset these, gradually taking on less risk.
I am not a qualified financial planner, so readers should keep that in mind! And of course, we all have different tolerance of risk, but I do think the length of retirement is sometimes not recognised when assessing the risk of investment options in retirement.
Couldn’t agree more!
The system of automatic reduction of risk in your 50’s and 60’s seems to fail to take into account the average age span now days.
I am retired (early 60’s) and have the bulk of my super in high risk with my pension coming out of the lower risk portion.
I find that the age pension rules are punitive if I continue to work. I have been offered a role of 20 hours per week at $30 an hour but can’t take it as it disqualifies me from the aged pension. My husband is still working, aged 71.
We have very little in super -$123,000 in total.
I don’t understand how others with large financial assets can receive the pension and we can’t.
I am a supporter of universal aged pensions and dismantling the large workforce charged with pension access and management.