Minimum pension reduction offers opportunity for growth
Among the Federal Budget proposals that received the least fanfare was the extension of the ‘temporary’ relief on the minimum drawdowns for account-based pensions. Whilst the media attention on the legislative change immediately highlights the fact that it benefits the wealthy more than the rest, it affords an entire generation of Australians greater flexibility.
Few commentators or retired investors for that matter seem to understand the fact that the entire superannuation is set up to ensure the vast majority of your assets are removed from the tax-free environment prior to your death, whether you spend them or not.
This is the reason behind the increasing minimum drawdown required introduced way back in 2007 and highlighted in the table below:
|Age||Minimum %||Reduced Minimum %|
|Less than 65||4||2|
|65 to 74||5||2.5|
|75 to 79||6||3|
|80 to 84||7||3.5|
|85 to 89||9||4.5|
|90 to 94||11||5.5|
The change comes in response to what has been one of the most powerful periods of saving in the history of Australia, and in many parts of the world. Movement restrictions combined with a general fear for our own health has seen spending on everything from consumption to travel and eating out come under pressure, resulting in additional savings being accumulated.
Rather than being forced to pull these funds out of super and perhaps spend them on purchases that may not have occurred, the policy may well support more self-funded retirees from dipping into the Age Pension sooner.
The SMSF Association’s CEO John Maroney agreed with the extension, saying “the temporary reduction in the minimum drawdown rates will help retirees manage the impact of volatility in financial markets.”
“The reduction is designed to reduce instances where retirees may have to sell some superannuation investments in a volatile or depressed investment market simply to satisfy the Government’s minimum pension drawdown requirements, so, in the current geopolitical and COVID climates, extending the cut in drawdown rates is an important initiative that will help many retirees.”
According to the SMSF Association, another positive from the budget was the decision to allow commutations to be made from certain non-commutable pensions to resolve excess transfer balance amounts. “We have been strong advocates of this reform so it is pleasing that the Government has decided to move forward with a reform that will be important to some retirees” says Maroney.