Some government reports can be as dry as dust, particularly those covering the finer points of superannuation legislation. The good news is that members of our team at Retirement Essentials read all the reports and legislation changes so you don’t have to! But to our surprise, a recent discussion paper released by Treasury on the ‘Retirement Phase of Superannuation’ is far from dull. It’s written in an accessible style and we’ve learned a lot about how the government views superannuation and how it’s working (or not) for ordinary Australians.
Retirement Essentials’ director, Jeremy Duffield is responding to the Treasury call for ideas on how to improve this aspect of retirement income and we’ll share Jeremy’s insights with you when they are available. But meanwhile one of the most important points highlighted in this discussion paper was the way that many retirees view and respond to the government mandated superannuation withdrawal rates. Let’s begin with a refresher on how these rates are set.
Minimum super drawdowns
The minimum amounts are set by the Australian Government on accounts which have moved to spending phase, i.e. a retirement income stream (usually an Account-Based Pension). The legislated minimum annual payments for super income streams run within a financial year. They are applicable to pensions or annuities that have been commenced on or after 1 July 2007. Superannuation and annuity providers calculate this minimum annual payment on 1 July each year, based on the account balance of the member or annuitant.
There is no maximum withdrawal amount. (There is an exception, however, for those retirees using a Transition to Retirement strategy.)
The stated reason for the need for retirees to withdraw their age-related minimum amount is to ensure that retirement savings, in the form of superannuation, are used to fund retirements and not just saved as potential bequests for the families of the retirees.
You may recall that, for retirees with retirement income streams, the minimum amounts were halved during the years of the Covid pandemic. That was to assist retirees who had little chance to spend the full minimum, due to reduced economic opportunity and extensive lockdowns. These rates reverted to their normal levels last July as shown in the table below.
| Age on 1 July | New (standard) minimum drawdown rates from 1 July 2023 |
| 60-64 | 4% |
| 65-74 | 5% |
| 75-79 | 6% |
| 80-84 | 7% |
| 85-89 | 9% |
| 90-94 | 11% |
| 95 or over | 14% |
Where’s the problem?
The difficulty lies in the interpretation of minimum withdrawals. According to the Treasury discussion paper, many retirees believe these minimum rates are actually recommended by the government. They are not. They are a requirement to ensure that super, at least partially, helps to fund older Australians’ retirements.
‘Their purpose is to ensure that retirement savings receiving an earnings tax exemption are used appropriately for retirement income purposes’. Says Treasury.
But many retirees will need more money to lead a reasonable life in retirement. As the paper also noted:
‘Minimum drawdown rates are generic settings which are not designed for, and do not lead to an optimal retirement income for all retirees.’
The government suggests that retirees’ reluctance to spend more than these minimum amounts may also be linked to the need for more flexible retirement income stream products. Put simply, better designed retirement income products might encourage retirees to comfortably withdraw larger amounts. Additionally, after years and years of being told to ‘save’ for retirement, spending more than the minimum drawdown rate may seem to many older Australians like spending too much.
Another anomaly is that the drawdown rates are age-based. So the minimum amount is set for those aged 60-64 at 4%, whilst the higher levels of 9-14% are set for those aged 85 and over who will tend to have fewer years of retirement ahead of them. This may work for the government’s tax equity aims. But it does not correlate with well-documented phases of retirement when the early years tend to be more active, aspirational and higher spending, and the later years are generally associated with reduced expenditure.
How to set your own optimal drawdown rate?
Because Minimum Drawdown Rates are not a recommendation but guidance only, if you don’t need the minimum to live on, you can bank it or reinvest it. If you need more, as there is no maximum rate, you can withdraw more – your entire balance if necessary. These drawdown rates are there to ensure you won’t underfund yourself in retirement. Decisions about how much super to withdraw, in addition to your age-specific rate, will require consideration of all your possible sources of income, including:
- any Age Pension entitlement,
- other investments and
- work income.
It will help to have as thorough an understanding as possible about your super and your anticipated expenditure in order to ensure your super is working as hard as possible. Speaking with an adviser to learn more about super is a great start. So too is comparing different levels of withdrawals and running them through the Retirement Essentials safe spending simulator. It’s a really helpful way to better understand your spending options across the course of your retirement journey.
What do you think?
Do you find these mandated rates useful? Or unrealistic? If you don’t find them helpful, how much would you suggest as a minimum?
I don’t understand why governments mandate percentages of superannuation that retirees should withdraw each year. If retirees choose to be frugal, for whatever reason, why should they be forced to spend their savings? And if, at death, other people inherit their wealth, why is that such a huge problem? The deceased person probably has not drawn a full aged pension when alive so has not been a cost burden to governments, and inheritance taxes can recoup a lot of the tax benefits the deceased person may have enjoyed when alive. Moreover, if the forced superannuation withdrawals are returned to the superannuation account as voluntary superannuation contributions by the frugal retiree, doesn’t all of this mandated spending amount to much ado about nothing?
Re-invest it then as the article says !! Term deposits are now around up to 5% for 12 months fixed. We went the other way and enjoyed it. Some cracking holidays, several new cars and the house renovated. We worked hard and long not just to leave it to kids or the yet unborn grandkids in some cases I have heard of !!!. And by the way leaving a pile to the kids is also a factor in the distortion of the property market that we could well do without.
Thank you for clarifing the retirees rates of drawdown. We have been relying on our super with no aged pension for over 16 years, only a concession card. We find he ls 2 years have reduced our superannuationonly to the extent that we have lived within the minimum budgets of 35,000 to 40,000 but that this is now harder to manage. This is a godsend and we can now plan a holiday for 2024.
I AM NOW 75 YEARS OLD AND I AM REQUIRED TO DRAW DOWN 6%, BUT I FIND THAT I DONT NEED THAT AMOUNT TO LIVE SO I SHOULD BE ABLE TO REDUCE THAT TO SAY 5.5%
FOR PERIOD OF TIME IF MY SUPER FIND IS NOT PERFORMING VERY WELL AS WAS THE CASE DURING COVID.
THEY SHOULD INTRODUCE A VARIANCE OF SAY -1% FOR A LIMITED TIME FROM THE REQUIRED DRAW DOWN RATE. THAT LIMITED TIME COULD BE 6 MONTHS MAX.
Most responsible proactive people believe the Nanny State Govt should stop tinkering with other people’s savings.
This is obviously a not so subtle attempt to provide more funds for irresponsible people who made few sacrifices for retirement.
Once again the responsible will get fleeced for the irresponsible.
Is that an election I hear?
Retirees are not forced to spend this money. They are simply required to move it from the lower tax environment of superannuation. They could simply put it in the bank or better still higher interest term deposit. Until their income reaches $18.2k, they won’t pay tax here either. It is a way of prompting people rather than forcing them.
Very good point! Some days I really wonder what planet these self entitled boomers live on? Being one myself I find it hard to reconcile that I’m one of them???. We’ve been the luckiest generation ever.
very good to know
If between 60 and 75, and you believe that you don’t need the minimum amount that has to be drawn out, then you can always put it into an SG account and combine this with your super pension account. An additional benefit of this is that it becomes a tax free component.
Can’t spend the “minimum” without a good holiday and a fair bit of eating out anyway so it suits us!
I was retrenched from full time employment at age 72. Was doing part time work to age 76 then some consultancy work from then to present time. Income from this work and investments is currently about some $14,000. I have been living (really well) off these investments and small income. I have not touched my super at all in the last eight years or so. Super account is some $1,130,000.
Where do I stand with draw down?
Ta.
Hi Noel, thanks for reaching out. I assume by draw down you mean setting up an Account-Based Pension to start drawing an income from your super? If this is the case then the minimum you would need to draw each year from an Account Based Pension would be 6% of the balance if you are between age 75 and 79, and 7% if you are between the ages of 80 and 84. However, there are a few things to consider whether putting these in place and it is important to make sure you are clear on the differences between your existing accumulation account and an Account-based pension to determine whether it is the right choice for you. I would recommend a strategy consultation where we can discuss it in detail. Best wishes, Nicole.
Hello.. I am currently earning and income and salary sacrificing. I have currently have some superannuation ..I am 68 years old,and would like to know if I can income stream my super and would it effect my pension as I currently get approximately $400 / fortnight as my wife gets a wage also, kind regards Allan Adams.
Hi Allan, thanks for your question. In general superannuation is assessed the same for age pension purposes regardless of whether it is in an accumulation account or an income stream (as long as the account holder is over 67, and assuming you are talking about an ‘Account-Based Pension’ income stream and not something trickier like a lifetime annuity). This is because they are both treated as an asset under the assets test, and the income test looks at deemed rates on the balance and not the actual income you draw. To discuss this in detail and how it could apply to you I would recommend a Strategy Consultation. Hope this helps, Nicole.