Australian Government’s economic response to Covid-19 – the impact on superannuation benefits for retirees

22 Mar 2020

Lyn Formica

Head of SMSF Technical & Education Services

On 22 March 2020 the Government announced the second of their stimulus packages to support Australia through the economic consequences of the Covid-19.

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The Government has announced that the minimum pension requirements for 2019/20 and 2020/21 will be re-set to half the normal rates and there will be changes to the deeming rates used to calculate an individual’s income for a range of important government benefits (including the age pension). We have explained these changes in as much detail as is available at the moment here.

Temporary reduction in Minimum Drawdown Requirements

Similar to the approach taken in the 2008/09 Global Financial Crisis, the minimum drawdown requirements for account based pensions and similar products will be temporarily reduced by 50% for the 2019/20 and 2020/21 years.

The revised rates for the 2019/20 and 2020/21 years will be as follows:

Age of Member Percentage Factor

Under 65

2

65 – 74

2.5

75 – 79

3

80 – 84

3.5

85 – 89

4.5

90 – 94

5.5

95 +

7

At first glance this appears counterintuitive – all other measures in the announcement were about putting more money in people’s hands. The policy rationale is that one very obvious consequence of the current situation is that investment markets have fallen considerably and continue to do so. Many superannuation pension recipients will have been concerned about selling assets to make pension payments when their fund (or pension account in a large fund) did not have enough cash to make the payments. This measure will mean that those who don’t need additional income will not be required to take it out of their fund – potentially relieving some pressure to sell assets.

Whilst we are yet to see the amending legislation, we expect this change will work as follows: 

What type of pensions will qualify for the reduced drawdown rates?

The Government’s Fact Sheet says that the reduction will apply to account-based pensions and similar products. We expect the Government means:

  • account-based pensions (including transition to retirement income streams),
  • allocated pensions (including transition to retirement pensions), and
  • market linked pensions (also commonly called term allocated pensions).

We do not expect the relief to apply to lifetime or life expectancy pensions.

Will all superannuation funds (including SMSFs) offer the reduced drawdown rates?

We expect all superannuation funds, including SMSFs, will be able to take advantage of the reduced drawdown rates. However, there may be some SMSFs with very prescriptive minimum pension rules in their governing rules/trust deed. Funds in this position would need to amend their trust deed to take advantage of the 50% reduction.

How will the 50% reduction affect pensioners who have already drawn an amount equivalent to their reduced amount before the announcement?

These pensioners will not be required to draw any further pension payments before 30 June 2020.

If a pensioner has already drawn more than their reduced minimum, can they return the surplus pension payments to the fund?

No, there will not be a mechanism to return surplus pension payments. It may, however, be possible for some clients to recontribute the surplus (if they are eligible to contribute and the amount will be within their contribution caps).

What if a pensioner had say elected to treat all payments from their SMSF as pension payments up to their minimum and then lump sums from their accumulation account? How would payments taken before today be treated?

In our view, payments should be processed accordingly to the rules which applied at the time of the payment.

For example, before 1 July 2019, Craig instructed his fund to treat any payment he took from the superannuation fund as follows:

  • firstly, a pension payment (up to the minimum payment amount) and then
  • a lump sum from his accumulation account once the minimum had been met.

Craig’s minimum for the 2019/20 was originally $40,000 (ie $1m x 4%). He took a payment of $45,000 on 1 March 2020. His reduced minimum is now $20,000. How should the $45,000 be treated?

On the basis of the election he made for the 2019/20 year, the first $40,000 will be a pension payment and the remaining $5,000 will be a lump sum from his accumulation account.

What about pensions that start after the announcement?

We expect the temporary reductions will apply to all pensions, not just those in place before the announcement was made.

Is any action required now?

Pensioners who want to minimise the amount they withdraw from superannuation in the current financial year should turn off/adjust any automatic periodic payment arrangements.

We will cover the broader impacts of this change in our upcoming online Masterclass – SMSF Strategies.

Changes to Social Security Deeming Rates

The Government will also reduce the pensioner deeming rates for financial investments from 1 May 2020 by 0.75% as follows:

Singles Couples

Investment Value

Deeming Rate

Investment Value

Deeming Rate

Up to $51,800

0.25%

Up to $86,200

0.25%

Over $51,800

2.25%

Over $86,200

2.25%

While deeming rates are not explicitly linked to the RBA cash rate, this latest change is largely triggered by the RBA’s decision to announce further interest rate cuts last week. The policy logic is that pensioners may well see their incomes decline and hence lower income levels from investments should be factored in when calculating their age pension and other social security benefits.

As more details come to light we'll continue to keep you informed with regular updates.