Do receive a superannuation pension, from your superannuation? Referred to as an account-based pension, then generally you will be over 65 or over 60 and retired.
You would be aware that there are significant tax benefits on receiving an account-based pension. Essentially, the earnings on the assets in the superannuation are tax-free. That is, there is no tax on the interest or dividend earnings nor is there a capital gains tax payable where these assets are sold in the superannuation fund. Also, the payments made to you, the pensioner, are also tax-free. The only requirement is that you withdraw a minimum pension each year.
Prior to COVID-19, the minimum pension that you were required to withdraw was dependent on your age bracket as indicated in the table below.
| Age | Minimum % withdrawal |
| Under 65 | 4% |
| 65 – 74 | 5% |
| 75 – 79 | 6% |
| 80 – 84 | 7% |
| 85 – 89 | 9% |
| 90 – 94 | 11% |
| 95 or more | 14% |
However, as a result of COVID-19, the minimum pension withdrawal or payment has been halved, as indicated in the table below.
| Age | Reduced rates by 50% for the 2019-20 and 2020-21 income years (%) |
| Under 65 | 2% |
| 65 – 74 | 2.5% |
| 75 – 79 | 3% |
| 80 – 84 | 3.5% |
| 85 – 89 | 4.5% |
| 90 – 94 | 5.5% |
| 95 or more | 7% |
As the share market dropped significantly during COVID-19, the government introduced this concession for people who did not need their whole pension entitlement and preferred to withdraw less from their pension account. By withdrawing less from their pension account they were not selling shares and realising a loss simply to satisfy the legal minimum withdrawal requirements.
What does this mean?
Say you are aged between 65-74, rather than taking a pension of 5% of the asset value in your pension account you can choose to withdraw only 2.5% and still retain all the taxation benefits. Say you have $500,000 in your pension account, rather than withdrawing $25,000 you can reduce your annual withdrawal to $12,500. However, whilst reducing the pension to $12,500 would more than likely be the best taxation outcome, could you afford to live off the pension of only $12,500? The answer would depend on what assets such as cash and shares you hold outside of your pension account. If you can live off the $12,500 plus other assets outside of super, then reducing the pension is probably the best option. If you cannot live on this amount then you will need to retain the original pension of 5% or $25,000.
What you need to do
Prior to 1 July 2020 you need to contact your superannuation fund and ask them what is their default option.
That is, if you have previously nominated the superannuation fund pay you the “minimum”, will that minimum be based on the new rules or the old rules.
That is, take the example above, if you nominate the minimum will they pay you the pension of 5% and wait for your advice to reduce it to 2.5%, or will the default option be 2.5%. If the default option is 2.5% then your pension payment you receive in July 2020 may only be half of what you need, meaning you could have significant cash flow issues until August 2020 or possibly later.
If they pay you the 5% and you don’t need 5% then you may not be able to deposit the excess back into your superannuation fund.
So you need to contact your adviser or superannuation fund now to determine the default option.
Should you require more information regarding pension payments, contact Peter Quinn to submit an online enquiry or call us on +61 2 9580 9166. We also offer a FREE 45-minute consultation should you have other financial planning, taxation or superannuation issues you may wish to discuss.
The information in this document does not take into account your personal objectives, financial situation or needs, and so you should consider its appropriateness having regard to these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.