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Drawdown reductions needed for retirees - UPDATED POLICY

Please note that after the publication date of this article, the Government made these announcements on 22 March 2020. It moves policy in the direction requested by Olivia in the article that follows.

Early release of superannuation

The Government will allow individuals in financial stress as a result of the Coronavirus to access up to $10,000 of their superannuation in 2019-20 and a further $10,000 in 2020-21.

Eligible individuals will be able to apply online through myGov for access of up to $10,000 of their superannuation before 1 July 2020. They will also be able to access up to a further $10,000 from 1 July 2020 for another three months. They will not need to pay tax on amounts released and the money they withdraw will not affect Centrelink or Veterans’ Affairs payments.

This measure is estimated to cost $1.2 billion over the forward estimates period.

Temporarily reduce superannuation minimum drawdown rates

The Government is temporarily reducing superannuation minimum drawdown requirements for account based pensions and similar products by 50 per cent for 2019-20 and 2020-21. This measure will benefit retirees by providing them with more flexibility as to how they manage their superannuation assets.

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Without a doubt we are in very scary times. I was at the airport yesterday and it was eerily empty. Shops and food outlets were fully stocked and waiting for customers and there were none. Cabs lined up at the taxi rank, again no customers. At least five people I spoke to in one day didn’t know how they were going to make their next mortgage payment.

The Federal Government’s stimulus package is generous, without doubt, but they’ve forgotten about one important segment of our community: the self-funded retiree drawing a superannuation pension.

Once a super fund member moves into pension mode, they are required to draw a minimum amount out of the pension account each year which is a percentage of a member’s pension balance based on their age. This forces people to reduce their superannuation balances and dispose of investments to satisfy minimum drawdown requirements, unless large cash balances are held.

Reduced drawdowns during the GFC

During the GFC in Australia (2007-2009), the Government made the welcome decision to decrease the minimum pension withdrawal requirement for retirees in pension mode. This measure of relief was then  extended over several financial years. Minimum pension payment amounts were halved for certain pensions and annuities for the 2008-09, 2009-10 and 2010-11 years. It was then increased for the 2011-12 and 2012-13 years but did not return to the pre-GFC levels until 2013-14, as shown below.

Source: ATO Pension Standards

As the table indicates, pensioners over the age of 80 must drawdown a substantial 7% of their balance, rising to 14% for the over-95s. This is a large amount in a market where prices have collapsed over 30% in the space of a few weeks.

Many pensioners who don’t need to live off their pension savings wait until the end of the financial year to make the drawdown from their fund. But this year, following the severe impact of coronavirus, a significant number of Australian pensioners will be required to liquidate investments to satisfy the pension minimum. In many cases, the values of shares or investments have plummeted. How is this fair?

I’m delighted to see the Government making stimulus handouts but let’s extend the focus to the superannuation sector.

I’d like to see the Government repeat the precedent set during the previous GFC and decrease minimum pension requirements. Give pensioners the opportunity to sit on their investments until market conditions (eventually) recover.

Other items for retirees to consider

1. Postpone drawdowns

I’d suggest that anybody that doesn’t need to draw down their pension consider holding off to see if the Government announces any relief.

2. Pension stop and restart

People with pensions that want to preserve their money in the super environment may consider commuting their existing pension and commencing a new one with a lower balance. If their investment value has decreased, it will mean that the pension value is lower. The percentage they will then need to drawdown will then be lower. Consult an adviser before adopting this strategy.

3. Arrange an Enduring Power of Attorney

An Enduring Power of Attorney (EPOA) is a legal agreement that enables you to appoint another person or people to make financial, personal, medical or property decisions on your behalf in the event you are unable to act. It’s important to note a Power of Attorney is effective if you have mental capacity. If in any event you lose mental capacity, a Power of Attorney ceases to operate.

As we cannot foresee our future, all SMSF trustees in particular should have an EPOA in place for their SMSF operations as once a trustee loses capacity to act, an EPOA cannot be put in place.

4. Check your trust deed is up-to-date

My final tip for SMSF trustees is to ensure your trust deed is up to date. If it doesn’t allow you to utilise any of the strategies in this article, you can’t do it.

 

Olivia Long is Managing Director, SMSF at Prime Financial Group. This article is general information and does not consider the circumstances of any individual.

 

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13 Comments
Steve
March 25, 2020

I imagine the policy change on minimum drawdown rates is retrospective in nature for the 2019-20 FY. If so, then does this mean that someone who has already met or exceeded the new minimum drawdown rate (by making withdraws on a monthly or quarterly in the current FY) is not be required to make further drawdowns for the remainder of this FY?

Graham Hand
March 25, 2020

Hi Steve, that would be my expectation, although I have not seen written confirmation.

Geoff F
March 22, 2020

Re point 3 in this article, "Arrange an Enduring Power of Attorney", could the following statements be clarified:
1. "It’s important to note a Power of Attorney is effective if you have mental capacity."
Is the intent here to say that an Enduring PoA can only be effectively given if the giver has mental capacity to give it?
2. "If in any event you lose mental capacity, a Power of Attorney ceases to operate".
This doesn't make sense to me. It appears to be saying that even if you have made an Enduring PoA when you had the mental capacity to do so, that just bcos the giver subsequently loses mental capacity, the previously effective Enduring PoA ceases to operate. I thought the intent of an Enduring PoA was that it continued to be valid, and that the Attorney could continue to act on behalf of rhe giver, even if the giver subsequently lost mental capacity.

Would appreciate clarification on these points.

Olivia
March 23, 2020

Hi Geoff, A power of attorney is only valid if the member has mental capacity. It becomes invalid if a member loses mental capacity.

An Enduring Power of Attorney will continue to be valid after a person loses mental capacity which is why it is important to have an EPOA in place when you are an SMSF trustee.

The intent is to demonstrated EPOA’s are more effective and therefore people should consider them and put them in place now while they can.

Geoff F
March 23, 2020

Thanks Olivia.
I misinterpreted what was said in point 3 - I had initially thought it was all about EPoA, even when it only said "power of attorney", but now realise it was contrasting EPoA against "standard" PoA.

Olivia Long
March 23, 2020

A power of attorney is only valid if the member has mental capacity. It becomes invalid if a member loses mental capacity.
An Enduring Power of Attorney will continue to be valid after a person loses mental capacity which is why it is important to have an EPOA in place when you are an SMSF trustee.
The intent of my article is to demonstrate EPOAs are more effective and therefore people should consider them and put them in place now while they can.

Sally Bembrick
March 20, 2020

I absolutely agree with Olivias article.
I am about to commute my pension and try to live off some meager savings. My Industry Super Fund pension now has a balance that is well below what it started with on 1st July 2019. If I withdraw the mandated 4% in June (and assuming that my super balance has yet to fall further) I will be going backwards quickly and will have a lower capital base from which to recover (although I am sceptical re it ever recovering to the previous levels in my lifetime).
I wrote a letter re minimum pension withdrawals to my local MP a few months ago. Andrew took my concerns to the Treasurer and the responses I received were quite flippant.
The Governments response to the impact of Covid-19 is admirable, but consideration has been given to everyone, except self funded retirees.
Another reason for a universal pension.

Jack
March 19, 2020

I was thinking that people who have been capped at $1.6m would have normally been thought to have had sufficiently strong earnings capacity to be able to live comfortably in retirement.
Now that interest rates are virtually zero , a conservative investor earning say 3% pa is generating $48k pa, not great but OK.
For people with far less in savings , the income shortfall becomes even more stressful.
If more risk driven, the earnings may have been higher but current and prospective losses may well result in their portfolio value falling 30% in value or even more .
We know that the market will eventually rebound but as the pensioner ages and has to draw down increasing percentages , their ability to rebuild their portfolio could well become impossible.
Olivia Long has written eloquently on the issue .
One key fear for the the old and frail is to have sufficient funds available to pay their way into Aged Care, so they scrimp on power and starve themselves rather than sell their accumulated assets.
The $1.6m cap was introduced to constrain contributions but not paper gains above this level.
Do the rules allow top-up contributions to be made to offset large unanticipated capital losses?
Rather than temporary government relief ,could consideration be made to provide a material one-off contribution for people over pension age.
The current annual limit and work test would not meet this need. What I was thinking was an ability to sell the home and downsize ie and using the lump sum difference as a “lumpy reverse mortgage “.
Anyway, just a thought bubble.

Graham Hand
March 19, 2020

"Do the rules allow top-up contributions to be made to offset large unanticipated capital losses?"

Once someone has transferred $1.6 million to pension, even if it then falls 50%, they cannot top it up. Agree, it does not seem fair if that's caused by market falls. Here's from the ATP website.

When the amount in your retirement phase account grows over time (through investment earnings) to more than $1.6 million, you won’t exceed your cap. If the amount in your retirement phase account goes down over time, you can’t 'top it up' if you have already used all of your cap space.

Jack
March 20, 2020

Thanks Graham.
I thought that would be the answer.
I suspect the longer term policy challenges to be posed by this recession are going to be monumental.
Incrementalism/steady as she goes is not going to cut it.
I also suspect we are all going to pay a cost ,be it taxes or loss of earnings or jobs/wages - a massive effort in raising national productivity and de-cluttering rules and regulations should be a key part of the response. Jack

Bill W
March 20, 2020

Perhaps it is also time to increase the $1.6m cap as this has been in place for a number of years now? In practice that limit has been effectively reduced by inflation.

Ron Gordon
March 19, 2020

I agree with the thrust of this article. I cannot, however, see why it continues to be good policy to have any fixed percentage of compulsory withdrawal since the 1.6 million dollar limit for tax free earnings in super was introduced. Super funds with balances of more than the 1.6 million pay tax on additional earnings anyway. Why compel superannuants with less than this figure to draw down on the very capital which saves the public purse from paying them a pension?

Kevin Macdonald
March 19, 2020

Absolutely agree with the article. Essential this is implemented ASAP. Have sent Email to our Fed Member who has responded positively. Suggest everyone do the same.
Ron Gordon has an excellent point. We should all lobby for that change. Treasury seems to have a fear of funds being retained in super at life's end. Forcing elderly folk to take large sums of money out of a protected environment at their most vulnerable time is incomprehensible.


 

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