The detail you need to know
Last week’s Federal Budget included a significant change to the rules regarding decumulation. In particular, how much money you are allowed to draw down from your super account post July 1, 2022.
These changes have raised a lot of questions from our members.
So this week we are unpacking the changes to super withdrawals and explaining the new rules. We are also sharing the differing drawdown rates (depending upon your age) as well as the most important considerations attached to super withdrawal rates.
What are super drawdown rates?
As we have previously explained in “What is decumulation and why should you care?’, when you start to access your super, you are starting the decumulation phase of your retirement income. There are many complex rules attached to the many ways you can (or can’t) get money out of your super. For the purposes of discussing the new drawdown rates, we are focussing on the rules attached to taking your money out using an Account Based Pension or annuity. Next week we will explore the rules for Transition to Retirement accounts.
Designated superannuation pensions and annuities are subject to rules about the minimum withdrawal you must make each year from the linked superannuation fund. Whilst there is a minimum amount, there is no maximum, except in the case of Transition to Retirement accounts. The minimum amount for pensions and annuities were set from1 July 2007.
When did the drawdown rates change again?
From March 25, 2020, these minimum rates were halved. The reasoning behind this reduction in the drawdown rate was that the sudden and dramatic fall in the Australian sharemarket, when the Covid 19 pandemic first emerged, meant that retirees’ savings balances dropped by up to 30% in a very short space of time. The Federal Government took the view that continuing to force retirees to withdraw from 4% to 14% of their superannuation during this time was forcing them to crystallize losses that might be recovered if they had time to sit out the market volatility. Thus the halving of the minimum rates was introduced in March 2020 and was due to cease on June 30 this year.
This will not now happen. As part of the 2022-2023 Federal Budget, these reduced drawdown rates will remain in place until June 30 2023. The rationale behind this decision is to give retirees a guarantee that they will not be forced to convert more than they wish from super savings to income for another year.
How is the minimum drawdown calculated?
The amount of your minimum drawdown is based upon your age and preservation status detailed in the table below. The amount for the financial year is calculated on your balance on the first day of that year, July 1. This amount must then be drawn down by the end of that financial year, i.e. the following June 30.
Minimum Drawdown Rates
|Age on July 1, each year||Default minimum, pre March 25, 2020||Temporary minimum, end June 30, 2023|
|Preservation age to 64||4%||2%|
|65 to 74||5%||2.5%|
|75 to 79||6%||3%|
|80 to 84||7%||3.5%|
|85 to 90||9%||4.5%|
|90 to 94||11%||5.5%|
|95 and over||14%||7%|
Are minimum drawdowns a good thing?
The primary purpose of superannuation is to provide income in retirement. There are numerous tax concessions designed to encourage people to do this. Because most retirees pay low, or no, tax on the money in their super fund, they are receiving a benefit on these savings. If they were able to continue to accrue money in their super accounts they could use these accounts as a form of estate planning, without penalty. By insisting that at least a portion of these savings are drawn out as income, it ensures some of these funds are indeed supporting retirement income and circulating in the economy.
Essentially this is a trade-off for tax free status enjoyed by these income streams.
That said, there is a case to be made that the minimum withdrawal rates are too high. Given longevity trends, a high proportion of today’s retirees will live into their 90s and beyond. Those who wish to plan their savings to last from, say, age 60 through to their mid 90s may struggle to do this at the same time as observing the (regular) drawdown requirements which start at 4% at preservation age and steadily increase to 14% at age 95 and over.
If you have an account based pension these changes give you added flexibility for at least another year. Our advisers can help you assess the impact these changes might have on you.