In recent weeks we have discussed various Commonwealth responses to the Coronavirus. One response that has received relatively little ‘airtime’ is the announcement that people drawing account-based pensions from their super fund can reduce the amount they must withdraw in this and the coming financial year.
Account-based pensions are income streams drawn from super funds. In setting up an income stream, the superannuant agrees to maintain most of their money within their super fund, withdrawing only a relatively small portion each year. In return for agreeing not to spend all the super at once, income and capital gains within the super fund are generally not taxed. In some cases, there are also advantages with Centrelink. The idea is that the super money will last for longer, reducing the overall extent to which people rely on the aged pension.
That said, a recipient must withdraw a minimum amount each year. The minimum that must be withdrawn is typically expressed as a percentage of the benefits within the fund. The percentage required varies according to things such as the age of the recipient – the older a person gets, the higher the minimum that must be withdrawn becomes.
One of the difficulties of these rules is that the minimum amount to be withdrawn is usually calculated using the super balance as at the previous June 30. So, a person is withdrawing money this financial year based on how much super they had at the end of last financial year. For most people, the value of their super assets in 2020 has fallen substantially since June 30 2019. This means that, as a percentage of their current super balance, the minimum amount to be withdrawn for 2019/2020 is higher than was intended.
As a simple example, if your super balance as at 30 June 2019 was $100,000 and you had to withdraw a minimum of 6%, that means you must withdraw $6,000. If the value of your super assets has fallen to, say, $80,000, then the $6,000 now represents 7.5% of your balance.
In response, the Commonwealth have announced that the minimum amount that must be taken as a pension has been halved for the 2019/2020 and 2020/2021 years. For people who can afford not to take less out of their super, this will have a number of advantages. Chief among these is an advantage for people whose super fund is not holding cash and would need to sell assets in order to pay the pension. For example, a fund may be holding most of its assets as shares. The market value of virtually all shares has fallen dramatically in the last couple of months. If those super funds had to sell shares now to access the cash needed to make a pension payment, they would be selling at a relatively low price. By halving the amount that needs to be paid out, the Commonwealth is reducing the imperative for super funds to cash out of growth assets. These funds can hold on to more of their shares and see if the market will rebound in the coming financial year.
Because the changes affect both the current and the coming financial year, the Commonwealth is, in effect, letting one year of pension payments be spread out over two years. Put simply, this means that pension recipients can take half now and “save the rest for later.”
The changes are not compulsory. Pension recipients do not need to halve the amount of pension they take. If you are drawing a pension, this is an option for you to consider. As always, if this change affects you, please do not hesitate to contact us so that we can discuss things further.