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Should I reduce my minimum drawdown rate on my pension?

The pros and cons of reducing superannuation or pension minimum drawdown rates

Retirees now have the option to reduce their drawdown rates, so should you?

On 22 March 2020, as part of their response to Coronavirus, the Government announced that retirees with account-based pensions and similar products would be able to reduce their drawdown rates. This measure is in response to the incredible market volatility we have witnessed. While the other measures released were in aid of putting more money into people’s pockets in the short term, this is about reducing income streams for pensioners while reducing pressure to sell investments in a downturn. When market values drop as we have seen, limiting the amount of investment units you need to sell can be an important strategy in reducing realised losses and preserving wealth. Similar measures were taken during the Global Financial Crisis. So, should you consider this?

Hear more from Luke Warren, Financial Adviser at Invest Blue.

 

Is reducing your drawdown rate a good idea?

Whether you take this action will depend on your current situation. Factors you may consider include:

  • Your budget – can you afford to reduce your pension income for a period of time
  • Your stage of life – depending on your investment time horizon, these drawdown reductions will have varying degrees of impact
  • The amount of cash-based assets you hold within your fund – if your fund was well resourced in cash-based assets, the current drawdowns may be pulling from these assets which are less impacted by market volatility.

“The main factor to consider is affordability. If you can afford to reduce your drawdown rates and still live within your means, this is something you should consider.” Says Luke Warren, Financial Adviser at Invest Blue. “The benefits that can be gained from this initiative increase as your age increases due to the amount you are required to withdraw. Allowing your funds to remain in a tax-free environment for as long as possible, give your investments the best chance to recover in a volatile market.”

How do I reduce my drawdown rate?

You will need to work with your pension provider. If you are a client, speak with your adviser for support with this. Things to consider include:

  • What is your current income payment amount?
  • What have you received in income payments for the current financial year?
  • What is your payment frequency?
  • Have you selected the minimum level? You may automatically be opted in to reduced payments.

Most funds are reporting that they will not be able to action these requests until April.

“If you had already withdrawn more than the new minimums, you will not be able to take advantage of the full reduction, nor will you be able to reinvest funds that had already been withdrawn. If you decide to reduce your rate now, it may mean living the next few months without an income.” Advises Luke Warren. “This policy resets for next financial year from 1 July 2020, so now is a good time to speak with your adviser about your plans for those 12 months.”

Which type of funds will qualify?

While the details are yet to be released, this is like to include:

  • Account-based pensions
  • Allocated pensions
  • Market-linked pensions

It is expected that all superannuation funds, including many SMSFs, will be able to participate in this reduced drawdown.

 

SMSF and drawdown rates

It is important to check your trust deed as some have very prescriptive rules around minimum pensions. For clarification, speak with your Self Managed Super Fund Administrator or Financial Adviser.

 

How do drawdowns work?

Your drawdown amount is calculated on you balance at 1 July in the financial year. You are required to take at least one payment within the financial year in cash, and all payments within the year must amount to the minimum drawdown. If your pension commences part way through a financial year, the minimum redraw is pro-rated for the number of days the pension is active in that year.

If you have already exceeded the new minimums you will not be able to reinvest that income into your account.

If you receive regular payments, you can opt to stop those payments until further notice.

 

Details of the policy

The reduction applies for the 2019-20 and 2020-21 income years. If you have already exceeded the new minimum drawdown rate, you will not be able to put the money back into your superannuation account.

Age Default minimum drawdown rates (%) Reduced rates by 50% for the 19-20 and 20-21 income years (%)
Under 65 4 2
65-74 5 2.5
75-79 6 3
80-84 7 3.5
85-89 9 4.5
90-94 11 5.5
95 or more 14 7

Source: Treasury